Category: State Taxes

Posted on by Jan Roberg

Multi-State Tax Returns: Living in Illinois/Working in the City of Saint Louis

St. Louis Arch

Photo by rustybrick on Flickr.com

I’ve written before about working on multi-state tax returns, see: http://robergtaxsolutions.com/2011/03/multi-state-tax-returns/

 

But this is specifically about Illinois and Missouri.  Even more specific than that—living in the state of Illinois and working in the City of St. Louis, Missouri.

 

Who would have thought this would be a big deal?  But for some people it might be.  You see, if you live in Illinois and work in Missouri, you get a credit for the income tax you pay to the state of Missouri to offset your Illinois income tax.  It used to be that the Illinois state income tax was only 3% while Missouri’s income tax was 6%.  The Missouri state tax pretty much covered all of most people’s Illinois income tax so you usually didn’t have a balance due on your Illinois tax return.

 

But now, the Illinois state income tax is 5%—and though 5% is less than 6%, Missouri allows more deductions than Illinois does so now the Missouri tax is often lower than Illinois tax.  And that’s where the City of St. Louis income tax comes in.  Most people call it the City of St. Louis earnings tax.

 

You see—Illinois allows you to use the City of St. Louis, Missouri income tax as a credit against your Illinois state income tax—and for some people, that really helps their Illinois tax bill.

 

Here’s the tricky part—even though you’re allowed to do it—it’s not automatic when you prepare your tax return.  You’re going to have to go in and manually claim it.  For example:  in my tax software, the program will automatically compute the credit for the Missouri state income tax, but it leaves the City of St. Louis out.  Same with Turbo Tax.  If I want to claim the credit for the St. Louis City tax, I have to go to the Credit to taxes paid to another state form and override the credit.  (I take the Missouri tax credit and I add the City taxes paid and put that number in the override box.)

 

If you’re working in Turbo Tax, when you’re on the credit for taxes paid to another state input page—you have lines for the different states.   Your Missouri tax credit should already be there, and then you just add the St. Louis City Tax on the next line.  It’s not difficult to do; you just have to know to do it.

 

Here’s a warning:  I spoke with a representative at the Illinois Department of Revenue and he told me that while it’s perfectly legal to claim a credit for taxes paid to the City of St. Louis, that you shouldn’t be surprised if you receive a letter from the Illinois Department of Revenue questioning that claim.  Don’t be frightened by this.  What happens is that the computers check against your state income tax and when the numbers don’t match it kicks out a letter to the tax payer.  If this happens to you, you just respond that you claimed the St Louis City tax as well.  You probably will need to include a copy of your W2 showing the city tax paid.   He said that it happens a lot with people who work in Paducah, Kentucky which also has a city tax.

 

Now if your Missouri income tax credit already covers all of your Illinois tax, you don’t even need to bother with the St Louis city tax—your tax credit is only good up to the amount of tax liability you have to Illinois.

 

But if you’ve done your Illinois return and you’ve got a balance due—that City of St Louis tax can come in mighty handy.

Posted on by Jan Roberg

Tax Tips for High Income Earners

Luxury Tax

Photo by youraddresshere on Flickr.com

 

UPDATED 2013

Perhaps I should subtitle this: Who Are All These Rich People Who Don’t Pay Any Taxes and How Come I’m Not One of Them?

It’s frustrating isn’t it? You work hard for your money, you’re taxed at 28-35% federally, plus your state tax, real estate tax, sales tax, etc., and then you hear on the news about all these rich people who don’t pay enough in taxes. Makes you want to scream, doesn’t it? And I haven’t even mentioned AMT yet!

As a wage earner, you’re kind of stuck (The rich people with really low income tax rates aren’t wage earners like you, but I’m guessing you knew that anyway.) You’re going to receive a W-2 that reports your income and – let’s face it – it is what it is. But that’s a good thing, be glad you have a job that earns you good money. But the goal here is find ways to reduce that taxable income.

Easy one first: max out your 401(k) plan. This one is so basic I wouldn’t even think to say it, but I’m shocked and amazed by the number of high income wage earners who don’t do this. Those of you who work for companies where you get kicked out of the plan because not enough lower income employees participate are exempt from this scolding-that’s a whole other problem that I don’t have a cure for. But if you’re making enough money to be reading this post, then you need to maximize your 401(k) contributions. For 2013 and 2014, the maximum amount you can defer is $17,500. (If you’re in the 33% tax bracket, then that’s over $5,000 in tax savings!) If you’re over 50, you may defer $23,000.

Cafeteria plans: These are those other services that you can set aside money for—tax free, to be used later to pay for health care or child care expenses. Some companies have a huge selection of these benefits, but health and child care are the two most common ones. There’s a hitch with cafeteria plans though, it’s use it or lose it so don’t put aside more money than you intend to spend.

People often ask about the tax credit they can get from paying for day care service and don’t they lose the credit if they pay for day care through their work. That’s true. But look at the reality—at your income, the best you’re going to get in a tax credit is 20% of what you spent on daycare. By paying your child care expenses out of your cafeteria plan, you’re saving whatever your tax rate is so you’re better off. Any child care money that wouldn’t qualify for the child tax credit will be regular taxable income to you.

As a high income earner, you’ve probably already met my not-so-good friend Mr. Alternative Minimum Tax. The AMT winds up costing you many of the deductions that other taxpayers usually claim, but this is a tip that’s important for you to know. While the AMT may eat away many of the deductions that you could have claimed on your Schedule A form, it’s still a good idea to do the paperwork anyway. Depending upon what state you live in, you can often claim your itemized deductions in your state even though they were lost on your federal return. Not all states do this and you might need to play around to see what works best for you.

For example: here in Missouri, you can’t claim a deduction for your state income tax paid, but if you substitute state sales taxes paid on your schedule A then that’s still a deduction. For most people, state income taxes paid is a much bigger deduction than state sales tax. But if you’re dealing with AMT then claiming the lower state tax amount paid doesn’t change your federal taxes—you’ve still got the same tax liability either way. So, in Missouri you’ll want to claim the sales tax rate instead of income tax so that you get the larger deduction on your Missouri state taxes. Also, by doing this it makes your state refund not taxable for next year, and let’s face it, you don’t need any more taxable income.
Many of the tax programs give you updates on how an item on your tax return affects your federal taxes. If you’ve played around with this you’ve probably given up claiming certain deductions, (like state income tax and employee business expenses.) But make sure that you check the value that these deductions have on your state return, you don’t want to miss out on anything that you can possible claim.

 

Posted on by Jan Roberg

Two State Tax Returns: Live in One State, Work in Another

Photo by Jimmy Emerson on Flickr.com

I get a lot of questions from people about working in one state and living in another. That’s pretty common here in Saint Louis where we have lots of folks living in Illinois that come over the river to work here and vice versa. Today I’m going to talk about doing your tax return when you have two states to deal with.

First, the technical words you need to know:

The state you live in is called your resident state. There will probably be a check box or something like that in your computer program. If you live in Illinois, then your resident state is Illinois.

The state you work in (but don’t live in) is called the non-resident state. In this example, Missouri is the non-resident state.

Tax liability: This is not your refund or the amount of money that was withheld on your W2. Tax liability is a number computed when you prepare the state tax return. It will say “tax liability” on your state income tax form. This is the dollar amount the state says that you owe them for taxes before they take into account what you’ve already paid through your withholding or estimated payments.

That’s not so hard, right? Next, you need to make sure you do your tax returns in the right order:

Always do the federal return first. Make sure that it’s done and that it’s right before you start your state returns. If you finish, and then go back in to make changes to the federal, you’ll have to go back and double check everything on the state returns and that can be a pain in the back, so finish the federal first.

Next, do the non-resident state—that’s the state you work in. That one’s easiest. You only pay tax in that state for the wages you earn in that state. Usually, when preparing a non-resident state return, there will be a check box that says “non-resident” somewhere in your software. Be sure to check it. You’ll want to make note of your “tax liability” for the non-resident state. You’ll need that number for your resident state return.

After you’ve finished the non-resident state, then you can prepare your resident state return. You resident state is going to tax all of your income (including the wages you earned in the other state.) The resident state will include your wages, interest, dividends, stock trades, retirement income, and basically everything else that’s taxable.

Things to know about the resident state return:

Even though you pay tax on all of the income you earn to your resident state, you will get a credit for taxes paid to another state. For example: using our Illinois/Missouri return again—since you paid income tax to Missouri for the wages you earned while working there, Illinois will give you a credit for those taxes paid so you won’t end up having to pay twice for working in another state.

The form you need to complete will have different names depending on the state, but it will basically be called a Credit for Taxes Paid to Another State. Sometimes it will be listed as an NR Credit. Depending on which software you use, you might have to dig for it. Some software programs are really easy and it will just pop up automatically when it recognizes that you have multiple states.

Remember the tax liability number I told you to remember? Well that’s going to go on your NR Credit form. Some software is really good at automatically plugging it in for you. In some other programs, you’ll have to manually enter it. The important thing is that you know that number needs to be there and that you know to look for it.

I’m getting a really big refund from my resident state, can that be right? Most likely not. When you see an unusually large state refund, it’s always a good idea to take a closer look. Check to make sure that the income numbers match up to the federal return and that the Credit for Taxes paid to another state was computed properly. It’s rare to get a big refund to your resident state unless you’ve had some other income that had withholding. The credit for taxes paid to another state usually will almost never be more than what you would have paid for taxes in your own state.

I’m showing that I owe a whole lot of money to my home state, can that be right? Maybe yes, but maybe no. The first thing you want to check is that you’ve taken your credit for taxes paid to another state. That’s the most common problem when you owe a lot. Other factors could be working in a no-tax state while you’re living in a taxing state. For example, let’s say you live in Louisianna but work across the border in Texas. You won’t pay taxes in Texas so there’ll be no credit for taxes paid there. In a case like that, you’ll definitely owe. Also, you could have a big difference because the states have different tax rates. For example: Missouri’s tax rate used to be twice as much as Illinois. If you lived in Missouri and worked in Illinois (opposite of our example earlier), you’d still owe Missouri about as much again as what you paid Illinois. (Now the rates are much closer, but people who live in Missouri and work in Illinois will still wind up owing extra for their Missouri taxes.)

What if I live in a reciprocal state? Some states have arrangements with their neighboring states to share tax information and tax revenues. In a situation like that, you’ll just pay taxes in your home state. The states will actually sort out who gets how much of your tax money. Usually, it’s simply a matter of checking the “reciprocal state” button in the software.
For most people, if your federal return is fairly simple, preparing two states is not that difficult. Use a good software program, follow these directions, and you should be fine.

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Posted on by Jan Roberg

Multi-State Tax Returns

Preparing multi-state tax returns is tough.

It isn’t always easy preparing your taxes when you’ve worked in more than one state. We can help you get it right!

 

 

I get many calls from people who prepared their own returns with two or more states and they all say something pretty similar, “I did the return, the federal is okay but the state just doesn’t seem right.”  Then I ask, “Do you owe way more than you think you should?”  “Yes, how did you know?”  I do this for a living.  The quick answer is to check to see if you took a “credit for taxes paid to another state”, that’s usually where the problem is.

 

Normally, I would have put that at the end of the blog post, but it’s such a common problem that I figured it needed to go first.  Quick answer and you’re done.  If you need more information, I’ll start from the beginning.

 

Two states can usually be handled by most of the major tax software companies with no problem.  Remember the credit for taxes paid to another state and you should be good.  On the other hand, three or more states can send your software into a tizzy.  Even with my professional grade software, I still have to compute numbers by hand and manually input them into the program.  If you’re dealing with three or more states, spend the money on a professional.  It’s a good idea to ask, “Have you ever done a California return before?”  (Or Ohio, or North Carolina, or whatever.)  Experience helps.

 

Back to the two states:  There are two situations where you could have two state returns.  One would be you moved from one state to another, for example moving from Indianapolis to Chicago for a job.   The other would be where you live in one state but work in a different state, for example living in St. Louis, Missouri but working across the river in Alton, Illinois.  These two types of situations use different forms.

 

Moving:  When you move from one state to another, you’ll be filing your two state returns as a “part-year resident”.  You’ll be completing paperwork that says how long you lived in the state, what your earnings were for the state, etc.  You should only be taxed on the income that you earned while you lived and work in the state.  If you withheld properly, your taxes should come out normal, no big refunds, nor big balance dues.  Most of the time in a case like this, you won’t be filing a “credit for taxes paid to another state” because the “part year resident” return will handle you income allocations.  (Most of the time—there’s 50 states and they all have different rules, so in some cases you’ll still be doing the credit for taxes paid to another state.)

 

Living in one state and working in another:  this situation is a little different.  You will be a “resident” of the state you live in and a “non-resident” of the state you work in.  The state you work in is the state your company is going to withhold taxes from.  But the state you live in is going to tax your income too.  This is where it’s really important to remember the credit for taxes paid to another state, because if you miss taking that credit your tax bill could be enormous.  Sometimes, the tax bill is still pretty large even when you’ve done everything right.  For example, here in Missouri our state income tax rate is 6%.  Next door in Illinois it’s 3% (although it’s moving up to 5% this year.)  If you live in Missouri and work in Illinois, you’re going to get hit with a pretty harsh state tax bill unless you had Missouri taxes withheld or paid estimated taxes.

 

Here’s some other tips that will help you with your multi-state return:

1.  Always do the federal return first.  Don’t start the state returns until the federal is done and you feel that it’s correct.  If you have to go back and make changes to the federal, your state numbers will be off.

2.  Non-resident income:  that’s wages that you were paid in a state you didn’t live in.  It also includes self-employment performed in the state.

3.  Resident income:  the state you live in will tax everything, in addition to your wages, it will tax your pension, interest, investment income, everything.

4.  Moving expense deduction-always goes to the state that you moved to, not the state that you moved from.

This is a pretty quick and dirty summary of multi-state tax returns.  If these tips don’t solve your problem, do call us and get some help.  They’re not always easy to handle and we do this for a living.