Which Form Should You Use?
Many states have dedicated forms for taxpayers who were residents for only part of the year, but some use the same forms as full-year residents with special calculations. Check your state tax authority’s website to find out which form you should use. It’s usually denoted with “PY” if your state has a special form for part-year residents, and that’s the form you should use. You must fill out a part-year resident tax return for each state where you lived during the year.
Part-Year Residency vs. Nonresidency
Don’t confuse part-year residency with nonresidency. Part-year residents are usually those who actually lived in the state for a portion of the year, although there are some exceptions to this rule. A nonresident simply made income in the state without maintaining a home there.
Dividing Income Between States
Part-year tax returns are usually prepared based on your total income from all states, and then your tax liability is prorated based on how much income you made in each location. This is easy to figure out if you moved to a new state to begin a job there. You’ll receive a W-2 form from each employer, and each will tell you how much you were paid for that particular job. But it can get more complicated if you moved while you were still working for the same company because, in this case, you would only receive one W-2. The W-2 will show the total amount that your company paid you, so you’ll have to split the income between the states on your own. You can do this in two ways.
Option 1: Allocate Based on How Long You Lived in Each State
You can allocate your income to each state based on the number of weeks or months you lived there if your income is relatively the same every month. For example, you might have worked 11 months of the year, taking one month off between jobs. You moved to your new state and started working there in early June. This means you would have spent about seven of 11 months working in your new state. You would use the 7/11 fraction to allocate your income to the new state. The remaining income would go to your old state. You could use weeks instead to allocate your income with more accuracy.
Option 2: Use Payroll Information from Your Employer
Using a pay stub to allot your income is usually more accurate, especially if your income fluctuates from pay period to pay period during the year. Try to get pay stubs, timesheets, or other records from your employer to help you estimate the actual income you earned in the first state you worked in.
Unearned Income vs. Earned Income
Earned income derives from wages, salaries, and tips, while unearned income comes from non-employment sources. Some examples of unearned income include interest, dividends, some Social Security benefits, and capital gains. Unearned income is generally allocated to the state where you were living at the time you received it. For example, the income would be attributed to your new state if you sold stock at a gain just after you moved there. You’ll have to allocate your unearned income based upon the fraction of the year you lived in that state if it can’t be clearly attributed to one state. Nine out of 12 months would be 9/12, for example.
If You Have Both Unearned and Earned Income
You would simply calculate your unearned income in State A, and add to that your earned income in State A, to get your total income for State A if you have both earned and unearned income. You would do this for each state where you were a resident during the year.
Prorating Your Tax Liability
Many state tax returns will use the percentage of your income attributed to that state to prorate your tax liability after you’ve determined how much you earned in each location. This percentage is equal to the amount of income you made in the state, divided by your federal adjusted gross income, which would be your total income in all states. It represents the percentage of your income that was made in that particular state. It’s then multiplied by the total tax amount for that state, which is based on your total income for the entire year. The amount of time you lived in the state doesn’t matter in this case. As an example, Jane moved from Idaho to Virginia to start a new job during the tax year. Her total taxable income for the year was $100,000. She made $80,000 in Idaho and the remaining $20,000 in Virginia. Using the tax table on her part-year tax return in Idaho, she has a tax liability of $5,000 based on her total income of $100,000. She would then multiply that $5,000 tax liability by 80% for a tax liability of $4,000 because she only made 80% of her total income in Idaho: $80,000 Idaho income divided by $100,000 total income is 80%. The same process would be repeated on her Virginia return, using 20% ($20,000 Virginia income divided by $100,000 total income) to prorate the Virginia tax liability.
Prorating Deductions
Some states use this same percentage to prorate deductions, which are then subtracted from the income allocated to that state. The state tax amount is based upon the taxable income figure that results. Using Jane’s example again, let’s say that she had $15,000 in total deductions in Idaho. This deduction amount would be multiplied by 80%: $80,000 Idaho income out of $100,000 total income. This would give Jane an Idaho deduction amount of $12,000: 80% times $15,000. The $12,000 prorated Idaho deduction amount would be subtracted from her Idaho income of $80,000 to find Jane’s taxable Idaho income using this method. She would have an Idaho taxable income of $68,000. Her Idaho state tax would be based upon that amount.
What About Income Before You Moved?
Jane would also include the income in her Virginia total if she had earned income in Virginia before she physically moved there. Most states require that part-year residents pay taxes on income they made while they were residents, as well as income received from sources within that state.
Payments and Tax Credits
You’ll use the actual amount of tax withheld from your paycheck for each state—and any estimated payments that you might have made to each state—to make calculations for these amounts. No adjustment is made to payments and tax credits. Tax credits in each state can be subject to special calculations, so read the instructions carefully. And don’t neglect to take advantage of the credit for taxes paid to another jurisdiction. States must offer this credit to part-year residents after the U.S. Supreme Court ruled on May 18, 2015, that two states can’t tax the same income.
