Parents never paid state tax for out-of-state rental property

1. As a nonresident of Illinois they should have been filing IL nonresident returns for each year they had source income from IL on that property. As they have never filed, the statute of limitations for assessments has not started. Assuming that K/year is substantially less than their federal income, the amount of tax is probably quite small for each year as the computation includes a ratio of IL income to federal income.
2. If they had filed and paid tax to IL and then paid tax to MD where they are residents on the same income, they could have calculated a MD state credit to avoid double taxation on that same income.
3. #2 is also applicable to any tax they pay to IL on the gain from the disposition of the property.
4. There is no way to just file one return for either IL or MD. They must file a tax return for each year as a nonresident of IL and if they pay IL tax on those returns, they can amend their MD annual returns to seek a credit. I will assume that MD probably has a statute of limitations relating to how far back you can amend a state return to obtain a refund. Therefore, it is possible that they can not obtain a refund from MD for some of the older years.

The above is based on MD & IL tax law as it exists today. It is highly likely that this procedure has not changed since 2013.

Just remembered that IL uses the income ratio (State/Federal) to determine your deduction. The IL income less the deduction is then multiplied by a flat tax rate to arrive at the IL tax.

I assume "returns" was a thinko for "records". 3 years is not necessarily the limit, especially for real estate.

But you're quoting a half-remembered guideline of the _Federal_ Internal Revenue Service, and using it in a discussion of _state_ income taxes. States don't always follow the same rules as the IRS.

So they would need to file a return to IL for each year starting from 2013.. As for MD refund, I think you can only get refunds for past three years. This seems like a lot of work and hassle for just $500 in owed taxes. Is there a simpler method? I suppose they can hire a CPA but he will probably charge $500+ to tell them how to pay $500 :-)

I am not sure I follow what you are saying here. I checked an IL state return and the only deductions I see are for the number of exemptions from the federal return . So it is a flat rate times the FAGI minus the exemptions..

I probably could have been clearer. Illinois allows nonresidents to make adjustments to income. Most of the federal adjustments would be disallowed in Illinois to a nonresident as they do not relate to IL. E.g., The deduction for 1/2 of SE tax would be disallowed unless you had IL self-employment income. Educator expenses would be disallowed unless you were an employed as an educator in IL. But... some of those federal adjustments are allowed in full. I.e., you use the full federal amount. This could wipe out any IL source income and leave you with no IL base income subject to tax. E.g., alimony paid is allowed in full as a subtraction from your IL source income. Your HSA deduction is allowed in full. Your tuition & fees deduction is allowed in full. Any student loan interest deduction is allowed in full. Now, if you did not have any of those, then you will be left with IL base income subject to tax. The only deduction left would be the ratio of the exemption allowance and then a flat tax rate.

No. But see my other reply. They may not owe IL any tax.

I suppose they can hire a CPA but he will probably charge $500+ to tell them how to pay $500 :-)

They could probably hire an EA for $350. :-)

They do not have any of those deductions. They are both over 75 and retired.. I am not sure I follow you on the "ratio of the exemption" allowance? Could that wipe out the $2000 yearly rental income?

Assuming neither one of them are blind and using 2017 IL tax law, their exemption deduction would be $6350 X Ratio. The ratio is derived by dividing your nonresident IL Base Income (basically the rental income) by your IL Base Income as if you were a resident of IL. This number would approximate your federal AGI plus tax-exempt income less any taxable social security and less any taxable retirement income from a qualified retirement plan. So... the smaller the denominator the higher the ratio. A .315 ratio would generate a $2000 deduction leaving them with no taxable income. Once you get the taxable nonresident amount, you multiply by 4.3549% to derive the tax owed.