Understanding Those Part-Year Returns

In the Live Community, we are seeing a lot of questions about part-year and nonresident returns. In this blog, I’m going to talk about part-year returns. Since there are many questions on the Oregon part-year return, I’m using Oregon as an example. Just remember that not all states handle their part-year return the same as Oregon but most follow a similar pattern.

Before we get started on the "tax and form" theory, I want to be sure you understand how TurboTax determines that you will be filing a part-year return. As you enter the Personal Info for your 1040 return, be sure you indicate "Yes, I was a resident of more than one state in 2007." And on the "Tell Us About Your Move" screen, enter the date you became resident of your current state and name the state you moved from. With this information, TurboTax determines if you will be answering state questions for a resident or a part-year resident return. For Oregon, the part-year return is Form 40P.

Part-year returns are filed when you’ve lived in more than one state during a year. Let’s say you lived in California for 9 months and then moved to Oregon on October 1st.

Most states will have a two column form. In one column TurboTax enters your income as if you were a resident of that state all year. The other column TurboTax enters the portion of income that was earned or received while you were a resident of that state.

Earned income (wages/self employed income): The income you "earned" while you lived in California is taxed in CA and earned in Oregon is taxed in Oregon. For an Oregon part year return, if the Oregon wages are not separately stated on your W-2 then you can compute the Oregon wages by a ratio of days worked in Oregon over total days worked for the year.

Unearned income (such as interest, dividends, alimony, stock sales, and social security benefits): Unearned income is taxed by the state that you lived in when you received the unearned income. If you sold a stock on April 30, 2007, then that sale is reported on your California return. If you received interest income from your California bank but closed the account when you moved, then that interest goes on the California return.

With those two columns,the state return has your total income for the year and the portion of that income that belongs to that state. Different states will handle adjustments/ deductions/ exemptions in different ways. We’ll skip that area.

Now we’re down to figuring out the taxes. Most states will first determine the tax as if you were a resident of that state for all year. Let’s say that tax is $5,000.

Then there will be a calculation to determine the percentage of that state’s income compared to all of your income for the year. Sometime it’s the part year taxable income divided by full year taxable income.

The Oregon percentage is determined by dividing Oregon (modified) adjusted gross income by (modified) federal adjusted gross income. The percentage shows up on line 39 on Form 40P.

If your federal adjusted gross income for all of 2007 is $50,000 and $10,000 of that is considered Oregon’s income then your percentage would be $10,000/ $50,000 or 20%.

The next step is to multiply that full year resident tax ($5,000) by 20% and the tax you will pay to Oregon is $1,000. Whew! Ain’t state taxes fun!

I know this blog has been long and tedious but I do hope it answers some of your questions on your part-year returns.