MO and OH non-resident allocations

[appelman]

I have a client who is a CA resident with rental properties in MO and OH. A previous preparer made some allocations of state subtractions and deductions that strike me as implausible, to say the least, but I would like to run them past someone who is more familiar than I am with the states in question.

Missouri allows a subtraction of Medicare B and D premiums (Schedule MO-A). The preparer allocated these entirely against Missouri-source income on Schedule MO-NRI.

In a similar vein, Ohio allows a deduction of federally taxable Social Security income (On IT-1040, Schedule A). Again, the preparer allocated this entirely against Ohio-source income on Form IT-2023.

Can anyone see any justification for either of these allocations?

[AJsTax]

Ohio

Ohio starts with the Federal AGI and then subtracts out the income earned outside of Ohio. So if the SS deduced Federal AGI,(Social security is not taxable to Ohio) ok. If the SS deduction reduced the rental income, then it was prepared incorrectly. You should end up with taxable income for Ohio the same as the Sch E sourced to Ohio with the possible adjustment on depreciation items that are not allowed to Ohio.

[Snaggletooth]

Two Separate Processes

Appleman, I think I may understand where you are headed with the question.

State income taxes, in general, involve a two-step process:

1) Calculate the taxpayer's Gross Income everywhere, including income not earned in the subject state. This income is adjusted
by various plus and minus for items that differ with Federal AGI. I believe these kind of adjustments are what were referred to in
the original post. Based on the Gross Income, the state tax is then calculated as if taxpayer were earning in that state ONLY.

2) Apportion the income as to what percentage is earned in the subject state. The income apportioned to the state may or may not
include the adjustments mentioned above, and will not unless the nature of the adjustment involves the income itself. I think this
may be why Appelman is questioning the prior preparer and I believe his concerns are valid.

Multiply the tax computed in 1) above X the percentage of apportionment to arrive at tax liability to that state.

[appelman]

Snag's got it!

It's Step 2 that's the issue. As AJ points out, the Ohio is really nonsense. You can't allocate against Ohio-based income a deduction of income that is not allocated to Ohio in the first place. In the MO case, since health insurance premiums are not associated with any particular income source, it would seem reasonable to me to allocate to MO in the same proportion as income is allocated to MO. But not the whole thing! Ain't it amazing what supposedly qualified practitioners get away with?

Appleman, I think I may understand where you are headed with the question.

State income taxes, in general, involve a two-step process:

1) Calculate the taxpayer's Gross Income everywhere, including income not earned in the subject state. This income is adjusted
by various plus and minus for items that differ with Federal AGI. I believe these kind of adjustments are what were referred to in
the original post. Based on the Gross Income, the state tax is then calculated as if taxpayer were earning in that state ONLY.

2) Apportion the income as to what percentage is earned in the subject state. The income apportioned to the state may or may not
include the adjustments mentioned above, and will not unless the nature of the adjustment involves the income itself. I think this
may be why Appelman is questioning the prior preparer and I believe his concerns are valid.

Multiply the tax computed in 1) above X the percentage of apportionment to arrive at tax liability to that state.