Double The Tax Fun – 2 States!

Q.  I am having a difficult time trying to figure how much I owe in state tax.  I lived and worked in California from 1/1/2009 through 8/7/2009.  I began living in Colorado on 8/8/2009 through the end of the year and worked from home for the same company I worked for back in California.  State taxes were withheld for each state on the income made while living in each state (California withholding stopped when I moved to Colorado)  Do I owe California state income tax on the income I earned while living in Colorado?  If so can I get a credit as I was also taxed by Colorado on that income? Thanks!

A. Multi-state tax situations are always so much fun to decipher.  Over the last several years of my tax practice, I’ve prepared multi-state returns for Iowa, Missouri, Oklahoma and Montana in conjunction with Arizona.  Each state has different laws regarding what income must be counted.  However, residency is the most important.  In your case, if you have documentation showing that you physically relocated on the date you mentioned, then it becomes much easier to prove that your residency changed.  The company you work for is irrelevant to the solution.

California is one of those states with huge budget problems right now.  In an audit, they will try to prove that you did not change states completely.  Residency involves switching your drivers license, sale of the old home or cancellation of the lease, change of mailing address, car title address changes, voter registration changes etc.  If CA is able to prove that you only will be in CO temporarily, then they may determine that you owe CA tax on everything. I don’t know the tax law as well in CA, but they may provide a credit to you for tax paid to CO if it is determined that you actually owe CA tax on everything earned last year.  Check with your tax preparer.

Good documentation is key.  For this reason, I would visit a licensed tax preparer this year.  The complexities of dividing up income and maintaining adequate documentation as well as the right questions to ask to determine your true residency status is worth the price of the professionally prepared return.

Yikes, No Taxes Withheld!!

Q. I found out (quite to my surprise) last month that my employer has not deducted CA state taxes from my paycheck ALL YEAR! Jan-Aug 08. I found out because they then suddenly started deducting and I noticed the difference. When I questioned them, they said they had found out the previous month that state taxes were not being deducted and now also needed to deduct for the tax that was not taken out in the first place.  What do I do?

A. This is a very serious problem and I can understand your confusion.  One thing not noted in your question, did you receive a pay stub each time?  California has some of the most stringent labor laws in the country. Your employer is  required to provide you a statement showing the  total wages you earned and the deductions from your gross pay.  If you were provided a pay stub, did you not see there were zero taxes withheld?  Have you filed CA tax returns in the past and had no liability?  If so, the withholding is perhaps not necessary anyway for state.  If you did indeed have a tax liability in the past, you definitely should be paying closer attention to the pay stub.

Does your employer have a DE-4 on file for you?  If so, he is required to withhold taxes based on that statement.  If he does not withhold, you are on the hook for the difference.  A principled employer will pay the taxes relating to the mistake for you. This will increase your income since they are paying taxes on your behalf.  If the taxes are not paid for you, estimated payment may be in order and a quick call to the Employment Development Department to report the lack of withholding may be in order.  I did not include all the details from your question, but some of the things going on at that employer are a bit disconcerting.  The things they asked you to do appear to show ignorance or blatant disregard of their withholding responsibilities.

Prize money and withholding

Q. I received a check yesterday for winnings from a game show on which I recently appeared. They took non-resident California tax out of my prize money. Do I have to pay that tax AND Arizona (my resident state) tax AND federal tax on the money? I have heard that there might be a way to get the California tax back (it was 7 percent). Is this possible?

A. This topic stirs up such strong feelings in people. Remember Richard Hatch? He won Read more »