Husband lives and works in OH. Wife lives and works in MI.

[Hamacher]

I have a client that one spouse lives and works in one state and the other lives and works in another. How would you handle the State returns? It seems as though each State wants to treat them both as residents or both of them as nonresidents.

[Snaggletooth]

File MFS Both States

I'm not that familiar with Michigan or Ohio either one, but with me living in a long, narrow state I get plenty of state returns.

You're going to have a hard time filing either state as a non-resident. However, for most states, there is very little penalty for
filing married and separate. Most states tax rising incomes with rising rates, but do not have multiple rates for different filing
status like the federal does. Most of them DO have different std deductions and exemptions, but beyond that there is little
problem with filing separate.

There are seldom additional penalties for MFS, such as being forced to itemize and loss of EIC. Most states do not allow itemizing
anyway.

I would try the MFS option first, before I would get into a logistic problem getting states to accept non-residency. This seems to
be a tailor-made situation for MFS, at least on a state basis.

[Koss]

Ohio and Michigan

I have to disagree with Snag, at least in this case, depending on certain facts and circumstances.

I practice in Ohio, and I do a few Michigan returns.

MFS is certainly an option. And in some cases, due to the structure of Ohio income tax rates, MFS can produce a much better result on the Ohio return than MFJ. So it is probably a good idea to try it both ways.

But in other cases, choosing MFS may result in a much higher tax liability on the federal return, and any gain on the state returns may not be enough to make up for it.

You can't go MFS on the state returns and MFJ on the federal. Neither Ohio nor Michigan allows this. In Ohio, the filing status on the state return must be the same as the federal. Michigan, curiously, allows a joint state return if the federal returns are MFS, but not the other way around.

Hamacher wrote:

It seems as though each State wants to treat them both as residents or both of them as nonresidents.

It may seem that way in your tax software. But this is not the case. Both states allow an MFJ return to be filed, with a different residency status for each spouse.

FYI: Both states use the same form for residents and nonresidents. There is no "Form MI-1040NR", or "Form OH-1040NR." In both states, residents and nonresidents file the same tax form. Nonresidents use Schedule NR.

On the Ohio tax form, it is superficially obvious that each spouse can have a different residency status. There are check boxes for each spouse. Here's a link to the form:

http://www.tax.ohio.gov/Portals/0/forms/ohio_individual/individual/2012/PIT_IT1040_FI.pdf

Michigan is counterintuitive. Even when the filing status is MFJ, the form provides only one set of boxes: resident, part-year resident, and nonresident.

However, the Michigan instructions say:

- - - -
Line 8: Residency. Check the box that describes your
Michigan residency for 2012. If you and your spouse had
a different residency status during the year, check a box
for each of you. Both part-year residents and nonresidents
must file Nonresident and Part-Year Resident Schedule
(Schedule NR). For definition of residency, see page 7.
- - - -

So even though there is only one set of boxes, you can check two boxes to indicate that one spouse is a resident and the other spouse is a nonresident.

Don't ask me how the Michigan Department of Treasury knows which spouse is the resident. I haven't figured that part out yet.

Using MFJ status with different residency for each spouse shouldn't be all that complicated. The tough part may be getting your software to cooperate.

With that being said, I have a word of caution:

You really ought to interview the client very thoroughly, to determine whether the husband and wife are really maintaining a different residency status. Here's why:

Michigan and Ohio have a reciprocal agreement. A taxpayer who lives in Michigan and works in Ohio pays only Michigan tax on his wages. Likewise, a taxpayer who lives in Ohio and works in Michigan pays only Ohio tax on his wages. This generally works out in a way that is fair and reasonable.

Your clients may not understand these rules. In some cases, the employer, or the payroll service, doesn't understand it. It can get really complicated really fast, particularly if you don't have all the facts.

Your clients may be telling you what they think they should say in order to minimize their tax, or in order to address an issue that doesn't really exist.

You need to ask some probing questions, such as:

Do they each rent an apartment, or own a home? Driver's license? Vehicle registration? Voter registration?

How long has it been this way? Did one of them move during 2012? One or both of them may have part-year residency in both states.

Each state has a formal definition of residency that you may want to look at.

You should not accept the client's assertion at face value. It is the tax professional, not the client, who needs to determine the client's residency status in each state. Residency is determined by a set of facts--not by the taxpayer's preference or declaration.

BMK

[Koss]

Ohio vs. Michigan

On a separate note, I really don't understand how this couple can stay married under these conditions.

On this fact pattern, college football games are sufficient to produce irreconcilable differences, and are therefore grounds for divorce.



BMK

[Lion]

But, they could both live in MI and one cheer for MSU and the other for U of M and still need a divorce lawyer before football season is over!

[Bonnie]

Just wondering why they are married if they aren't even living together. But guess that's their business.. There is the reciprocal state agreement if they lived in same state and both worked in different states.