Handling Multi-State Returns in Lacerte®

Many tax preparers find themselves completing the federal tax return and one state return for their clients. Usually, that sole state return is in your home state, and you are familiar with all the ins and outs of its preparation. However, situations arise when your clients have lived, worked or earned income in another state. In these situations, Intuit® ProConnect™ Lacerte® makes it easy to prepare a multi-state return, while ensuring clients get the appropriate credits and making use of any reciprocal agreements between the states.

Nonresident of a State

Typically, nonresidents reside in another state, but earn income in the nonresident state. A few key inputs will establish a state as a nonresident state. Within Screen 1, Client Information, you will need to add all of the states that need to be prepared, including the resident state and all nonresident states. You can add states in Lacerte by clicking on “Add” in the “Returns” pane towards the upper left corner of screen 1. Select the state you wish to add, then click “OK.” You can repeat this process until you have added all of the states you need.

Tip: If you have added too many states, selecting the state and clicking “Delete” will remove the state from the return.

After you have selected the states you need, select which state is the resident state, as of Dec. 31, in the “Resident Status” section. That state is treated as the resident state, while all other states added will be treated as nonresident states. If there is only one resident state, then make sure to check the box labeled “Full Year Resident.” We will talk about this input again when we discuss part-year residency. In addition, notice that when more than one state is added, the Multi-State checkbox is checked and greyed out by default.

Tip: If the taxpayer is a resident of a state that does not require the filing of an income tax return (Texas and Florida, for example), you can select that state as the resident state; however, you do not need to add it to the “Returns” pane.

You might next need to head to screen 55, Part-Yr./ Nonres. Information. Usually, you will not need to enter much in this screen, but some states require information, such as “days spent in the state as a nonresident.” Typically, each state will have its own sub-screen. You can jump to each state by clicking on the state’s name in the upper left pane. Be careful, however, as some of the input on this screen is an override [O] for the wage allocation between the states. We will cover the non-override input for the wage allocation in more detail toward the end of this article.

Part-Year Resident of a State
Part-year residents are residents of a state for only part of the year, and often, they are part-year residents of two or more states. The definition of a part-year resident depends on the state, so you may need to ensure your client meets a specific state’s criteria. However, using the following input, Lacerte will automatically determine which type of returns are appropriate for your client.

We will begin very similar to how the nonresident return was started above. Add all of the states we will need, including all part-year resident and nonresident states. The only difference is in our “Resident Status” section. Make sure to select the state the taxpayer was a resident of at the end of the tax year, just as before. This time, though, uncheck the box labeled “Full Year Resident?” By doing this, you have told Lacerte that you need to file returns in all of these states and the client lived in one particular state at the end of the year, but did not live in that state the entire year.

Lacerte just needs a bit more information to categorize these state returns. You will want input information on screen 55, Part-Yr./ Nonres. Information. States in which the taxpayer was a part-year resident will require the beginning or end dates of residency, and sometimes both. Just as in the prior scenario, some states may require total number of days as a nonresident. Make sure you enter this information for each state.

Sourcing Income

Lacerte can also easily calculate the appropriate credits on a multi-state return. To correctly calculate these credits, let’s discuss how to enter and source income and tax withholding within Lacerte.

It should be noted that several locations within Lacerte have columns or input for “State if Different” amounts. These entries are only used when there is a tax law difference between federal and state codes. This creates an adjustment on the state return. For example, ordinary income is different between federal and state due to different Sec. 179 limitations. In most cases, you will be able to select an input field with multi-state amounts and press Ctrl + E on the keyboard to bring up an allocation window.

Tip: The “Assign entries to” box at the top of some screens can be used to change all assigned state specific amounts to another state.

This “allocate multi-state amounts” window will allow you to enter each state on separate lines. This tells Lacerte what amounts were earned and in which states that income is associated. Similarly, you can allocate tax withholding the same way by pressing Ctrl + E, while having a tax withholding input field selected.

By allocating income and withholding using the “allocate multi-state amounts” window, the program will calculate all relevant credits, as well as use the correct amounts in the calculation of state tax liability.

One thing to note in this allocation window is the “Source” column. This column only allows two inputs, “N” or “S.” If you put an “S” in a row, then the amount on that row will only flow to the relevant state return. A row sourced with “S” will not be used in calculating the federal return. Similarly, “N” will use the input in calculating the federal return, but not the state return. It is recommended to use “N” sparingly, as some states rely on federal calculations when calculating the state’s return. Here is an example:

Let’s say we have a W-2 with $10,000 in income from Massachusetts and $15,000 income from New York. However, only $20,000 is to be reported on the federal return. After we have set up the return to include New York and Massachusetts from screen 1, we would then go to screen 10. From this screen, we would select the input field for wages and press Ctrl + E. One row would include the Massachusetts income, while the second would include New York income. A third row with US as the state would need to report the federal amount. Finally, we would include an “S” in the source column for the Massachusetts and New York amounts so that we do not double count those on the federal return.

Tip: Remember that states tend to handle credits for taxes paid to other states differently. Some states even have reciprocal agreements that can exempt residents from liability or withholding in another state.

We have briefly covered how to set up multi-state returns in Lacerte, as well as how to input amounts attributed to a specific state. Now, with Lacerte at your side, you will be able to confidently and quickly prepare returns for clients who earn income in numerous states!