Maryland double taxation ?Income Tax

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Q. Just wanted to run this by everyone to see if I've got it right. Taxpayer is domiciled in Colorado (maintained a domicile in Colorado and returned to it after working in MD) but was a statutory resident of Maryland in 2005 (maintained a residence > 183 days). So, it appears they are residents of both states and both states will tax their entire income since they are not part-year residents of either state. However, Maryland does not allow a credit for taxes paid to Colorado: "PART A – IMPORTANT NOTE FOR DUAL RESIDENTS A person may be a resident of more than one state at the same time for income tax purposes. If you must file a resident return with both Maryland and another state, use the following rules to determine where the credit should be taken: 1. A person who is domiciled in Maryland and who is subject to tax as a resident of any of the states listed in Group I or II can claim a credit on the Maryland return (Form 502) using Part A of Form 502CR. 2. A person domiciled in any state listed in Group I or II who must file a resident return with Maryland must take the credit in the state of domicile." (Colorado is included in Group 1) Colorado only allows a credit for Maryland source income taxed by Maryland, not the entire income taxed by Maryland. So, it appears that the Colorado source income is being taxed by both states. This doesn't surprise me. I just wanted to see if I was missing anything. Also, taxpayer left Maryland in 11/2005 but it appears that a statutory resident cannot claim part-year residency and must report their entire income for the year as a full-year Maryland resident. "WHO IS A RESIDENT? You are a resident of Maryland if: a. your permanent home is or was in Maryland (the law refers to this as your domicile). OR b. your permanent home is outside of Maryland, but you maintained a place of abode (that is, a place to live) in Maryland for more than six months of the tax year. If this applies to you and you were physically present in the state for more than 183 days, you must file a full-year resident return."

A. I finally got time to look into this a little bit this morning. Alas, I don't think you have missed anything. This clinker seems to arise from the fact that there is no "source" language in the Maryland credit statute. Most states allow residents credit for taxes paid to another state on income with a source in that state. There is some disagreement among states on the definition of "source" income, but generally income from personal services (i.e., wages) has its source where the services are performed; income from real and tangible personal property has its source at the location of the property; income from business has its source where the business is carried on; and income from intangible property has its source at the residence of the owner. So if you are taxed as a resident by both State A and State B, and you have wages from services performed in both states during the year, State A will give you credit for the tax paid to State B on your State B wages, and vice versa. In that situation, you would end up being taxed by both states on your intangible income -- interest, dividends, gain/loss on sale of stocks, etc. (A few states do allow a domiciliary resident credit for tax paid to another state as a statutory resident on intangible income. Rhode Island is an example, IIRC.) But in effect you would pay state tax on your wages only at the higher of the two states' rates. However, the Maryland statute doesn't have that "source" language; it allows a resident credit for taxes paid to another state on any income that is taxed by that state. There are some exceptions, however. Md. Code Ann. Tax-Gen. Sec. 10-703: (a) In general. Except as provided in subsection (b) of this section, a resident may claim a credit only against the State income tax for a taxable year in the amount determined under subsection (c) of this section for state tax on income paid to another state for the year. (b) Exceptions. A credit under subsection (a) of this section is not allowed to: (1) a resident other than a fiduciary, if the laws of the other state allow the resident a credit for State income tax paid to this State; (2) a resident fiduciary, if the fiduciary claims, and the other state allows, a credit for state income tax paid to this state; (3) a resident for less than the full taxable year for tax on income that is paid to another state during residency in that state; or (4) a nonresident. You see the problem: it's in Exception (b)(1). The laws of Colorado do allow you credit for state income tax paid to Maryland -- on Maryland source income, as defined by Colorado's lights. So, of course, Colorado does not allow you credit for the tax you pay to Maryland on your intangible income, or on income from services you performed in Colorado, because that's Colorado source income. But the Maryland statute says that as long as you got a credit from the other state, Maryland won't give you a credit. This seems such an unreasonable result that I wonder if the administrative interpretation of the statute (embodied in the form instructions you quoted) would be upheld by the courts. But I can see how they get there.

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