Which state should be filed?

[mblatour]

I have a client who is a 50/50 partner in a construction company. The company's address is his partner's home address in MN. They do work in both in MN and WI. The client lives in WI. His wife works in MN but pays WI income tax on her wages.

My feeling is that they need to file a MN and WI return. WI for the wife's income and MN because of the K-1 Partnership income being based in MN.

This may seem like a simple question, but I am really not positive on the answer.

[Snaggletooth]

File both states

as a Wisconsin resident and MN non-resident. Claim ALL income on the Wisconsin return, and then take a credit on Wisconsin return for the MN taxes paid on MN source income. The credit will be at the lower of 1)WI rate on the out-of-state income, or 2)actual MN tax liability for the year in question.

[mblatour]

Okay, so to clear things up

I should report on the MN Non-Res. form the portion of MN income from partnerships which results in $664 on MN tax due on $23,087 of income?

I am going to look into the WI credit right now. I haven't found it yet.

[KJ Judd]

Actually WI is a renegade. You get dollar for dollar credit for taxes paid even if the tax rate in another state is higher than WI tax rates. I know it's hard to believe, but 'tis so.

I used to prepare a huge partnership return (450+ partners) with many composite returns. We'd always tell the WI partners to elect into all the composite returns (unless they couldn't because of other income from the state) because their total tax liability would be the same & they wouldn't have the hassle of preparing all those extra returns.

[mblatour]

KJ Judd

I found the Schedule OS-Credit for Net Tax Paid to Another State for WI But once my software went through the calculations, it looks to come out to a credit of $333. The MN tax is $641. The percentage of the credit was 51% due to to the taxable income to both WI and MN being $11,980 and the amount of MN taxable income being $23,087. Therefore it doesn't match it dollar for dollar. What am I not doing right here?

[KJ Judd]

If line 2 and line 3 of Schedule OS are the same you will receive 100% credit for the taxes paid to MN. MN & WI have a reciprocity agreement whereby WI resident working in MN doesn't have to file a MN tax return. This means leave the MN wages off the MN return.

So then the MN source partnership income of $23,087 (amt?) is on line 2 as taxed to both MN & WI. Since wages aren't reported on the MN return and no other MN income, line 3 would also be $23,087. Then the tax liability (line 4) will also be the credit amount on line 8.

See WI Dept of Rev, Pub 121, Reciprocity for support for not reporting the MN wages on the MN return.

[mblatour]

Judd

What would be the point of filing a MN return if he doesn't have to report MN wages earned as a WI resident? Purely for information purposes?

I thought he'd have to pay tax to MN as non-resident, and then turn around and claim a refund amount (based on the credit for tax paid to another state) and that would pretty much wash things out to zero.

I'll take a look at Pub. 121 as well.

[KJ Judd]

If just MN wages, no MN return required. (Unless MN withholding was done on the MN wages. My understanding was this is not the case.) If MN partnership income, you may need to file MN tax return if over MN filing requirements.

All income needs to be reported to your resident state, so all income needs to be reported on your WI Form 1. (Client lives in WI.)

Hope that helps.

[mblatour]

Okay, so because there was only income from the MN K-1 Partnership of $23,087 and no other wage income from MN, he'd still have to file a MN return correct?

[S T]

Just had one

I believe that to be correct, as it is MN source income. I just completed a return, that I had a MN NR (due to farm), NC (part year residency) and CA(part year residency)

As stated above, watch for the other state tax credits.

Sandy

[mblatour]

Thanks for your input

Sometimes I get a little frustrated. Too many things on my plate with less than one week to go! As always, I appreciate the direction I get on this board.