Are certain deductions allowed for calculating MT part-year residency income allocation?

[doubleg10]

Client has 42% of Schedule C net income allocated to MT due to part year residency.  The Part Year Allocation worksheets have been completed within the Pro Series tax software.  However, the allocation of the SEP IRA contribution, SE tax deduction and SE health insurance deduction to the MT income are not being made within the software program thereby increasing the allocation of taxable income to MT.  Current ratio is MT source income (exclusive of the above-mentioned deductions) divided by MT AGI resulting in a ratio of 55%.  The MT AGI includes the deduction.

In summary, the question is: shouldn't the MT source income be net of the part-year allocation of the deductions for SEP IRA contribution, SE tax deduction and SE health insurance deduction and this resulting number be divided by the MT AGI.  If this was the case, the ratio would be decreased from 55% to 42% thereby reducing the MT income tax liability.

[qbteachmt]

What did you enter for Sched 1, Lines 15, 16 and 17?

[doubleg10]

Schedule 1 (MT Form) on lines 15-17 (Column A) show the federal amounts for SE tax deduction, SEP IRA contribution and SE health insurance deduction, respectively.

I don't understand why there is no allocation to the MT residency period of 8/1 - 12/31 for these deductions against MT source income.  The PY allocation worksheet within the MT portion of the program indicate the MT allocation.

[sjrcpa]

In theory it sounds like some should be allocated to MT.

Did you check the MT instructions to see if they break the theory?

[Terry53029]

I believe MT starts with federal AGI that already has taken the deductions you mentioned 

[qbteachmt]

Yes, "show the federal amounts"

And there are different provisions for part-year residents and for non-residents, which I believe is page 8 or 7 depending on which applies. There should not be a reduction to Net until those pages, which are the allocation.

[doubleg10]

Yes, the MT starts with the Fed AGI and then calculates the MT taxable income portion (PY allocation of Schedule net income plus PY allocation of dividends and income) by dividing that amount by the Fed AGI (modified minimally by a MT deduction.

Example:

Fed AGI - 135,808 (this is net of full deduction of SE tax deduction, SEP IRA deduction and SE health deduction.

MT AGI - 134,991 (adjusted minimally for taxpayers over 65 and MT tax-exempt interest)

MT source income is the PY residency allocation of Sch C net income and interest/dividend income which totals 75,549.  Therefore, making the PY resident ratio 55.96% (75,549/134,991)

It would seem that the proper calculation would be the PY income of 75,549 less the PY allocation of the three deductions which would reduce it to 56,557 thus making the PY resident ratio 41.89%, thereby resulting in less MT tax liability.

[doubleg10]

Here is what I posted to another reply (just in case the entire thread is not visible):

Yes, the MT starts with the Fed AGI and then calculates the MT taxable income portion (PY allocation of Schedule net income plus PY allocation of dividends and income) by dividing that amount by the Fed AGI (modified minimally by a MT deduction.

Example:

Fed AGI - 135,808 (this is net of full deduction of SE tax deduction, SEP IRA deduction and SE health deduction.

MT AGI - 134,991 (adjusted minimally for taxpayers over 65 and MT tax-exempt interest)

MT source income is the PY residency allocation of Sch C net income and interest/dividend income which totals 75,549.  Therefore, making the PY resident ratio 55.96% (75,549/134,991)

It would seem that the proper calculation would be the PY income of 75,549 less the PY allocation of the three deductions which would reduce it to 56,557 thus making the PY resident ratio 41.89%, thereby resulting in less MT tax liability.

[qbteachmt]

Do you have the Form 2 instruction booklet? I think you have something twice in your explanation, but I can't follow over the internet. Here:

https://mtrevenue.gov/publications/montana-form-2-individual-income-tax-return-forms-and-instruction...