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W2 with state wages exceeding federal wages - tax treatment in home state

EmsBTW2016
Level 4

I have a client with a W2 with wages from two states (AL and PA)

The AL wages + PA wages are more than Federal wages

In prior years the prior accountant included all state wages as income on the home state of Alabama.

For instance if Federal wages were 100,000 and AL wages were 10,000 and PA wages were 120,000 then the total wages shown on the Alabama Return was 10,000 plus 120,000 totaling 130,000.

Is this correct? I know in Alabama the resident is taxed on all of their income - but it doesn't seem right to include MORE wages on Alabama just because PA may not allow the same deductions for 401k etc. ??

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12 Replies 12
TylorValdez1
Employee
Employee

The input requires 3 entries. 100000 to US with no source. 10000 to AL with S for source. And 120000 to Pa with S source. The AL return should then only show the 100000 on line 5b of form 40.

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EmsBTW2016
Level 4

Thank you! This is how I have it entered, and it is pulling those amounts to the Alabama return line 5b (the total federal wages).

It looks like the prior preparer made a mistake by including PA wages as Alabama income. PA wages do not allow certain deductions like 401k and those those contributions are taxable, causing the PA wages to exceed Federal. I did not think it looked correct to have those higher wages taxed as Alabama income.

I am strictly working on 2020 tax returns right now but I think this would be worth amending after tax season? The prior year AL income is over 19k more than it should have been. 

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TylorValdez1
Employee
Employee

An Amended return for 2019 for the state would be appropriate and would help the client. Plus you can charge them a fee for the work.

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BobKamman
Level 13

But of course it can't be efiled because you didn't prepare the original.  

Taxpayer lives in Alabama, but does most of his work in Pennsylvania?  Maybe an airline pilot?  

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EmsBTW2016
Level 4

I am actually not sure exactly how it works but they client works in the food/wine/beverage industry - apparently this is how the company has been doing it for years? The client didn't even travel to PA this year but they say the W2 needs to show PA income.

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EmsBTW2016
Level 4

Do you know how I get rid of the critical diagnostic for Alabama form 40 that says that the amount of wages in column B of form 40 must equal the amounts on line 16 of the w2. The amounts on line 16 include the PA wages that are higher than federal - I wonder if this is why the prior cpa reported it the way they did. 

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TylorValdez1
Employee
Employee

You use the box 1 wages to do the allocation and would need to remove any inputs in box 16 as they are redundant. 

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EmsBTW2016
Level 4

That is what I have done - nothing is entered in the box 16 input but I am still getting the diagnostic. 

update - I think this might be a software issue because I just deleted all w2 input and went to start over - I get the diagnostic no matter what I do. Even just entering 100k as wages and nothing else gives me the same diagnostic. 

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TylorValdez1
Employee
Employee

Perfect. All you need to do is mark the diagnostic as Ignore and you can e-file when you are ready to. There is not a way to get the diagnostic to not show up.

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EmsBTW2016
Level 4

I am afraid of the return being rejected but I will just have to clear the diagnostic and file anyway if I can't get this fixed.

The taxpayer has a normal Alabama W2 with nothing in other states

The spouse is the one with the PA wages

I was able to get rid of the diagnostic for the taxpayer w2 by entering state wages in box 16 (even though the instructions in Proconnect say not to enter anything there unless state wages are different - that's the only thing that cleared it). I am trying to do the same for the spouse w2 but nothing is working. 

Do you think it'll be rejected? I mean, technically column B on form 40 will not equal the total amounts in box 16 since box 16 includes more wages from PA. This is so frustrating. 

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TylorValdez1
Employee
Employee

AL should not reject the return. You should be ok.

EmsBTW2016
Level 4

Alabama rejected the return. 
 Any advice?

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