Tax Guru – Ker$tetter Letter

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Archive for February 23rd, 2006

Just Like Social Security

Posted by taxguru on February 23, 2006


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Nonresident Taxes

Posted by taxguru on February 23, 2006

Q:

Subject: Unfair state tax structure for partial year residents
 
Unlike most states that I have lived at, Arkansas computes state income tax for partial year residents by adding both total year income and total Federal taxes paid in their calculations.  By doing this, it automatically raises the percent of tax because Federal taxes are higher.  This penalizes the part year residents because they pay a higher percent than full- year residents.  This doesn’t seem fair or legal.
Example:  I made $28,000 in Mississippi and paid $500 in state taxes (after my refund).  I made $17,000 in Arkansas and paid $875 and they want another $500!
Does that seem fair or legal to you?
I realize you may not want to answer that without a fee, but I was hoping to get advice from someone who had knowledge.
Thanks,

A:

While I don’t prepare any tax returns by hand, I do prepare several partial year and nonresident Arkansas tax returns each year with my Lacerte software.  Your description of how it’s done didn’t sound right; so I just reviewed the actual 2005 AR1000NR form

You are misinterpreting how the Arkansas state income tax form works.  It doesn’t add in Federal income taxes to the taxable income; although I have seen this on some other state tax forms. 

The Arkansas tax is calculated for nonresidents with the same tax rate schedule as for full year residents.  The twist comes in with the apportioning of the total tax based on the percentage of taxable income from inside Arkansas to all income.

While your claim that Arkansas is unfair to nonresidents isn’t correct in the context which you intended, I have seen plenty of cases in other states around the country where that is the case, especially California.  Some of the most outrageous examples are taxes on rental cars and hotel rooms, which are aimed at tourists from outside the state. 

How they can justify this is easy to explain.  Nonresidents can’t vote; so the rulers in those states have nothing to worry about in regard to punishment for screwing over those people.  In fact, they can sell the idea to their in-state constituents that the more money they are able to squeeze from out of towners, the lower the tax burden is on the full year residents.

In regard to your multi-state income tax returns, you really should be working with a qualified tax pro who can ensure that each state’s apportionment is calculated properly and that you are receiving the proper Other State tax credit on your home state tax return.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your help.  I certainly appreciate it.

 

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