VA resident AZ W-2

[commonstalk]

Client is a resident of Virginia. Last year he worked in VA, but later in the year accepted a job with Bechtel. Spent the last two months in Saudi Arabia. He'll spend all twelve this year in SA, qualifying him for the foreign earned income exclusion.

He received two W-2s, of course, the first with Virginia withholding. The latter (Bechtel's) was issued with Arizona the state of record, with no state withholding. Apparently this will be the case going forward, according to the client. Resident of VA, receiving an AZ state W-2, no withholding. I think most states treat foreign earned income favorably, however, Virginia is not one of them.

Any suggestions on how to handle it this year? At the moment I have him down as PY for VA and NR for AZ (2014). Is there a better way? Going forward?

Thanks

[Gary2]

Client is a resident of Virginia. Last year he worked in VA, but later in the year accepted a job with Bechtel. Spent the last two months in Saudi Arabia. He'll spend all twelve this year in SA, qualifying him for the foreign earned income exclusion.

He received two W-2s, of course, the first with Virginia withholding. The latter (Bechtel's) was issued with Arizona the state of record, with no state withholding. Apparently this will be the case going forward, according to the client. Resident of VA, receiving an AZ state W-2, no withholding. I think most states treat foreign earned income favorably, however, Virginia is not one of them.

Any suggestions on how to handle it this year? At the moment I have him down as PY for VA and NR for AZ (2014). Is there a better way? Going forward?

Unless there's intent to live permanently in Saudi Arabia (i.e., either become a citizen or get something equivalent to permanent resident status), the client hasn't lost VA domicile and should be treated as a full year VA resident. See http://www.tax.virginia.gov/content/residency-status, under "Individuals Living Abroad".

[Ken]

VA / Az tax

Arizona normally had an agreement with most states that if the client is taxed in both AZ and the other state on the same income, AZ will give a credit for the tax paid in the other state. Virginia however is not one of those states. I found that out the hard way. If Virginia is showing the income and AZ is not showing any income then I would file a Virginia tax form and claim all the income there.

[Ken]

VA /Az taxes

I read your post over again and so I will have to think about it a little. Az is a favorable state for foreign income exclusion , but not sure if there is no income on the AZ form then he will have to do it all from VA I guess. One thing i AM sure of is that AZ and VA have no agreement that if you have income from both states and try to get credit from one state for the taxes you paid in the other state to off set it, it wont work. AZ has that agreement with most states but not Virginia. I found that out the hard way.

[Gary2]

I read your post over again and so I will have to think about it a little. Az is a favorable state for foreign income exclusion , but not sure if there is no income on the AZ form then he will have to do it all from VA I guess. One thing i AM sure of is that AZ and VA have no agreement that if you have income from both states and try to get credit from one state for the taxes you paid in the other state to off set it, it wont work. AZ has that agreement with most states but not Virginia. I found that out the hard way.

This is tangential to the original question, but I need to clarify what's going on here:

AZ does not have an agreement with most states. Rather, they do what most states do, which is to unilaterally grant a credit to their (AZ) residents who pay taxes as nonresidents to other states.

AZ does have an agreement with four states: CA, IN, OR, and VA, but it's not the typical reciprocity agreement. The typical reciprocity agreement (e.g. between PA and NJ) says that the non-resident state won't tax wages of residents of a reciprocal state. Thus PA residents who work in NJ don't have to report that income to NJ, but NY residents who work in NJ do.

The reciprocity agreement that AZ has with the other four states doesn't do that, but instead does a non-resident credit - which is basically the opposite of the default case. In the default case, you pay tax to the non-resident state and claim the credit on the resident return. But with the type of agreement that AZ uses, you pay tax to the resident state, and claim the credit on the tax return for the non-resident state.

So, in the case where you learned the hard way, you should have been claiming the credit on the VA non-resident return.

None of which applies to the OP, because as near as we can tell, the client has never established AZ residency, and the reporting on the W-2 is a quirk of the employer.

[commonstalk]

Agreed

Gary, I and the client agree that he should be treated as a resident of Virginia. No, his intention is to "ride this out" for five years or so, while remaining a resident of VA/USA. The problem is Bechtel issuing the W-2 with AZ as the state, not VA. According to the client they don't seem to want to correct this. I'm at a loss as to why.

[Burke]

Client is a resident of Virginia. Last year he worked in VA, but later in the year accepted a job with Bechtel. Spent the last two months in Saudi Arabia. He'll spend all twelve this year in SA, qualifying him for the foreign earned income exclusion.

He received two W-2s, of course, the first with Virginia withholding. The latter (Bechtel's) was issued with Arizona the state of record, with no state withholding. Apparently this will be the case going forward, according to the client. Resident of VA, receiving an AZ state W-2, no withholding. I think most states treat foreign earned income favorably, however, Virginia is not one of them.

Any suggestions on how to handle it this year? At the moment I have him down as PY for VA and NR for AZ (2014). Is there a better way? Going forward?

Thanks

Why in the world does he have a W-2 for AZ? It appears from your post, he never lived there. He is a PY resident of VA for 2014.

[commonstalk]

Yes, that's true. He may have never even been to AZ as far as I can tell.

[Burke]

I guess the next question is, what state are they withholding tax for, if any.

[commonstalk]

That's my question, Burke. It doesn't make sense, but Bechtel did it anyway. And my client can't get them to correct and reissue.

[commonstalk]

His withholding should be for Virginia (this is his home). Bechtel ignored that and issued a W-2, with Arizona as the state. Even though they did this they (Bechtel) did not withhold AZ state income tax from his paychecks, and thus there is AZ income on his W-2, but no tax withheld.

His previous employer correctly withheld VA state income tax and his W-2 from the first employer reflects that.

[BOB W]

File a non resident AZ return and claim no days worked there. It should reduce AZ taxable income to Zero.

[commonstalk]

Got it

I replied earlier that I had it resolved, but was wrong so I deleted it. However, this time I did get it resolved. The W-2 with AZ, as I wrote earlier had no income and no state withholding. Blanks. So that's what I did in the software. Left those two boxes empty.
The answer was to put 0s in. This eliminated any tax burden to AZ, while filing the NR return.

This still has me concerned though. It should never have been attributed to AZ in the first place. I guess that's not a question. Client has to get this corrected so that we don't end up with a domicile in VA and a W-2 from AZ for the entire 2015.

Thank you all very much for your help and if you have any other guidance it's very welcome!

[AZ-Tax]

I run into a similar situation once a year BUT

I replied earlier that I had it resolved, but was wrong so I deleted it. However, this time I did get it resolved. The W-2 with AZ, as I wrote earlier had no income and no state withholding. Blanks. So that's what I did in the software. Left those two boxes empty.
The answer was to put 0s in. This eliminated any tax burden to AZ, while filing the NR return.

This still has me concerned though. It should never have been attributed to AZ in the first place. I guess that's not a question. Client has to get this corrected so that we don't end up with a domicile in VA and a W-2 from AZ for the entire 2015.

Thank you all very much for your help and if you have any other guidance it's very welcome!

I run into a similar situation once a year BUT it was AZ giving credit to the TP for taxes paid in another state. This is rather vice versa. Don't be surprised if AZ DOR sends a letter to your client something to the effect at any time in 2014 was your client a resident of AZ.

[Gary2]

If the W-2 is showing zero income attributed to AZ as well as zero withholding, i.e., boxes 16 and 17 are both blank, I'd just ignore it. Zero income doesn't create a filing requirement.