MD Non-resident Income Tax

A similar question came up on another forum and I tried running that person's numbers through a MD nonresident return with the same result that you had. I agree, it makes no sense at all. I haven't had time to work on it further but if I had that problem I would call the MD Comptroller's office and see what I could find out.

Katie in San Diego

Katie wrote in news: snipped-for-privacy@42g2000prb.googlegroups.com:

Thanks Katie. I'm 6 hours behind them but will give it shot. I would almost be willing to pay a practitioner, but we're only talking about $200-300 so I can't invest that much.

scott s. ..

Worse, let's play with different numbers:

$10,000 MD income $50,000 HI income (employment)

-$30,000 HI loss (schedule C)

So that hypothetical taxpayer has $30,000 income for Federal purposes, and $40,000 income for MD purposes. He'd pay less MD tax as a resident. (Unless, that is, MD just uses the $40,000/$60,000 as the fraction of his actual $30,000 they claim is "theirs" and taxes him on $20,000.)

Seth

I'm sure I could dream up an example even worse than that one .

There is a statutory provision (not new, if I remember right) that says a nonresident cannot "take advantage" of non- MD source losses. This is not the same thing as saying non-MD source losses are MD source income! But that's what happens when you work through the form. Surely what the statute means is that non-MD source losses must be added back to calculate the rate that applies to the MD source income.

I went through this in something of a hurry and thought I must be missing something. Scott's experience, though, with software giving him the same result, makes me wonder. I hope he can get a reasonable answer from the Comptroller's office and will share it with us.

Katie in San Diego

This example was so weird that I also looked at the MD tax form.

Indeed, the instructions are such that the loss is added back in to income. This seems extra odd because the non-resident form has three columns at the top for Federal income, MD income and non-MD income, so if they were to actually use the MD income column they should be able to skip all of this. Oddlly enough that column doesn't seem to be used anywhere on the form, except for computing a ratio for pro-rating exemptions.

It does seem to be a case of odd arithmetic going on here. I took another look at this after reading Katie's message, since the calculation of the MD income involves adding the non-MD loss to federal AGI and then subtracting non-MD income (which is further reduced by the non-MD loss). So it seems that they are counting the loss twice. Once by adding it to MD income and again by subtracting it from non-MD income.

So I think I agree that the tax form is horribly broken. But I suppose that one would have to litigate the issue to get it fixed.

Even better is the "Special Non-resident tax":

Special nonresident tax. Multiply line 13 of this form [505NR] by

1.25%. Enter this amount on Form 505, line 32b. If line 13 is 0 or less, enter 0

This seems to be taking the "behind that tree" tax strategy a bit far....

That's a challenge.

OK: Non-MD resident has $200,000 net income in business 1 (Sched C) $150,000 net loss in business 2 (Sched C)

If he has $1 of MD income (I know the threshold for filing exceeds that), the MD AGI factor would greatly exceed 1, but the worksheet limits it to 1. Therefore, he gets full credit for deductions. MD adjusted gross is $200,000. Subtracting exemptions and deductions, his taxable net income remains close to $200,000.

It looks worse: I don't see where his MD source income drops at all: MD wants taxes on the full $200,000 (less deductions & exemptions).

That would make some sense, but still not too much. A meaning that non-MD losses can't reduce MD income below actual MD income (which could otherwise be a result of limiting MD income to federal income + the usual state adjustments) would seem the most sensible.

So do I; or (since I'm just sitting here on the sidelines) the lawsuits could be fascinating.

Seth

Tom Russ wrote in news:48948f98-26e9-4f51-9599- snipped-for-privacy@q39g2000prh.googlegroups.com:

Thanks for "feeling my pain" :( I guess the "nonresident" tax is supposed to compensate for not paying a county portion of the income tax.

scott s. ..

The right thing to do is to fight this in court. But the cost and time of doing that would be more than $200, so it's better to just pay the "fine". Maybe a class action lawsuit is in order?