Non-resident Massachusetts ST Cap Gain

[Hoosier]

Any Massachusetts tax preparers out there... I've got a client who is a full-time resident of my state here in the midwest that must file a non-resident Massachusetts tax return. The client had a W2 from Massachusetts which is the only Massachusetts income. However, the client had some short-term capital gains on some stock trades for 2020. Based upon what I'm seeing in my software at this point, the ST capital gains are being included in the calculation of Massachusetts tax despite my efforts to exclude as non-MA income on line 14e of MA 1-NR/PY. I'm coming to the conclusion that ST Capital Gains are reportable as income on the non-resident Massachusetts return even if a resident of another state. Diving into the research more thoroughly but thought I would post my experience to this point in case someone might nudge me to a better understanding of this topic.

[Rapid Robert]

I think you should try to determine if the ST Cap gain is merely being used to come up with the non-resident tax rate, or is it actually being taxed as non-resident (source) income?

I'm not an expert on MA, but perhaps it uses the so-called "California method". Under this approach, the taxpayer's world-wide AGI is used to come up with the rate, which is then applied to source income.

For example, suppose someone is a non-resident of California, with $99K income in their resident state, and $1K of source income from CA. First, CA will figure the applicable rate as if they were a resident making $100K, then apply that rate to the $1k of income. This is quite different from figuring the rate of someone with $1K of taxable income (which would be quite low) and then applying it to $1K of income.

[Rapid Robert]

Hmm, never mind. I just checked TheTaxBook "Other State Topics" and it says MA does not use the California method, but instead does this:

"Determine state-source AGI. Nonresidents determine state-source AGI based on income that is derived from or connected with state sources. Deduction and exemptions, if available, are then prorated by a ratio of income received while a resident to total income. Taxable income is calculated by subtracting prorated deductions and exemptions from state-source AGI."

So, does your software have a place to indicate source state for ST Cap Gains? Most likely this would be entered at the federal input screen.

[ATSMAN]

Rapid Robert is correct in his research of the MA tax laws. Short term gains are mostly taxed at 12% rate in MA. So in your software you have to indicate every source of income which state should tax them. Most software have a grid where you can adjust that when you are doing part year or non resident state return. As a matter of law MA is not going to tax a non resident for income derived in their resident state. I have done many MA part year and non resident returns.

If you can't figure that out in your tax software try calling the support line or check their FAQ or knowledge base. BTW what is your tax prep software?

[Hoosier]

ATX software. Thank you to the two of you who offered some insight.

[ATSMAN]

ATX software. Thank you to the two of you who offered some insight.

I have used the old ATX software circa 2010 and I know you could adjust the state apportionment of income and deductions then so I am assuming the 2020 version still has that. I guess you just have to find it??

[Hoosier]

I believe I've zoned in on it and have made the proper adjustments based on your previous posts. Thank you for taking the time to provide some guidance. It is this type of interaction that really makes this forum valuable.

[Catherine]

ATX software. Thank you to the two of you who offered some insight.

True - but MA uses a ration of MA-source income to total income to apportion deductions and exclusions. They also want an adjustment to the socsec/medi $2,000 deduction to the portion that is attributable to MA-source wages only.