Troubleshooting Common Federal to State Transfer Issues

This situation is most often seen when taxpayers live and work in different states.

Typical example: Joe is a New Jersey resident who earns his entire $50,000 annual income in New York. He receives two W-2 forms from his employer:

• The first W-2 has NY, 50,000, and 3,000 in boxes 15, 16, and 17. Joe's employer has allocated $50,000 to New York and has withheld $3,000 in New York income tax.
• The second W-2 has NJ, 50,000, and 0 in boxes 15, 16, and 17. Joe's employer has allocated $50,000 to New Jersey but didn't withhold any New Jersey income tax.

Joe's salary is taxable in New York, where he earned it, and New Jersey, where he lives. To avoid being double taxed on the same income, he is allowed to take a credit for taxes paid to New York on his New Jersey return.

Because New York and New Jersey do not have a reciprocal agreement, Joe will have to file two returns: a New York nonresident return, plus a New Jersey resident return. He prepares his New York return first, to ensure that TurboTax applies the proper credit to his New Jersey return.

Joe's New York Nonresident Return

When Joe gets to the Form W-2 Summary screen, he sees this:

TurboTax has added the box 16 amounts from both W-2 forms to come up with a Total State Wages amount of $100,000, which is twice his actual income.

However, TurboTax is not calculating his NY tax liability based on the 100,000 figure, which means his NY taxable income isn't really being doubled (despite appearances to the contrary). This will become apparent after Joe clicks Done to go to the next screen, titled New York Income Allocation.

On this screen, TurboTax has automatically pre-filled the 50,000 figure directly from box 16 of his W-2. This is the income figure that TurboTax uses to calculate Joe's New York tax liability:

Because Joe's entire $50,000 salary was earned in New York, he does not need to make any changes on this screen. (The only reason he would need to change it is if his employer made an error in box 16 of his W-2 form.)

Joe finishes his return. His New York tax liability is $2,516 and he gets a $484 refund ($2,516 + $484 = $3,000 withheld).

Joe's New Jersey Resident Return

Now Joe is ready to prepare his New Jersey return. In the interview, the Income and Deductions Summary screen correctly shows $50,000 next to the Wages and Salary heading. And when Joe gets to the Summary of Taxes Paid to Other Jurisdictions screen, he sees that TurboTax has automatically calculated a $1,216 credit for taxes paid to New York using information from his New York return.

He does not get the full $2,516 credit because the credit cannot exceed his New Jersey tax liability of $1,216. The two figures cancel each other out and he owes no additional tax to New Jersey:

General Advice

Other state screens may look a little different than the New York/New Jersey examples given above, but the underlying principle is the same – TurboTax adds all W-2 box 16 amounts together, resulting in what appears to be double income on one or both state returns.

Simply continue through the interview, making sure the allocation screens show the correct amount. The income allocation for a particular state is the amount of income that was earned in that state (also referred to as "state source income").

Important: "State source income" is not to be confused with the state that the employer's corporate offices are located. For example, income that is earned in New York while working for a company headquartered in Delaware is sourced (i.e., taxable) in New York – not Delaware.

 

If your wages or withholdings did not transfer to your state return, go back to your W-2:

1. Click the Federal Taxes tab near the top of the screen.
2. Select the Wages & Income subtab.
3. Navigate to the Income Summary screen. 
4. Click the Update button to the right of Wages and Salaries.
5. Click Edit next to the W-2 that contains the state income and withholdings in question.
6. Scroll down to Boxes 15-17 (State wages and taxes withheld) and check the following:
   • 15 – State should contain the correct 2-digit state code. For example, if an Arizona resident wrongly chooses AR instead of AZ, the TurboTax State program for Arizona won't pull the information over. Click here for U.S. Postal Service state abbreviations.
   • 16 – Wages should contain the wages that were earned in the box 15 state. If this field is left blank, TurboTax sometimes transfers the box 1 (federal wages) amount, but not always.
   • 17 – State Income Tax should contain the taxes withheld amount (the withholdings) for the state in box 15.
7. Click Continue twice to save your changes. If necessary, repeat Steps 5-7 for other W-2s.

Seemingly insignificant W-2 data entry errors, such as misplaced decimal points or extra digits, can have dramatic effects on the state return.

Here is what a missing 0 on Form W-2, Box 17 did to this Maryland return:

W-2 box 17 = 400 (incorrect)	W-2 box 17 = 4,000 (correct)

To check your W-2:

1. Click the Federal Taxes tab near the top of the screen.
2. Select the Wages & Income subtab.
3. Navigate to the Income Summary screen.
4. Click the Update button to the right of Wages and Salaries.
5. Click Edit next to the W-2 that contains the state income and withholdings in question.
6. Scroll down to Boxes 15-17 and make sure those boxes are correct. Also make sure that box 15 contains the correct 2-digit state code. Click here for U.S. Postal Service state abbreviations.
7. Click Continue twice to save your changes. If necessary, repeat Steps 5-7 for other W-2s.