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How do you Properly Allocate W-2 Income between 2 States with ATX?


PJCCPA

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Hello, I am a brand new fully licensed CPA and a brand new ATX user going solo to start a part-time nights and weekends Tax Practice out of my home office.  My deadline is until December 1st to send back my ATX Software for a Refund and get something else.  I re-did my own Tax Return to Test out the software.   I am finding that the Federal Return is Accurate, but my wife and I have Income from both New Jersey and Delaware so we need to do a Multi-State Return.  How do I properly allocate income from W-2's to the proper states for my State Returns?  The Delaware and New Jersey Returns both want to pull in the Total Number from the Federal Return, so I would be getting overtaxed and under-refunded if I filed this way.  Is there a way with ATX that I can properly allocate my W-2 Income between each state?  If I can get the states to work accurately, then I can keep the software, but if not, I need to return it to get something else.   Can anyone help me?  Thank you in advance.

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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Thanks for responding, BulldogTom, I input from our W-2's as they were given to me.  When I used Pro-Systems F/X Tax earlier this year at my prior CPA FIrm that I worked for, it properly allocated my wife's New Jersey Income from her W-2 and my Delaware Income from my W-2's.  I input both states at the bottom for mine, however the ATX Program is including all of our Income from the Federal Return (I believe Line 7) at the top of both State Forms or Worksheets, so it is incorrectly calculating my Delaware State Income, Taxes, and Refund as well as for New Jersey.  How do I fix it to make each state pick up the right amounts from each W-2?  Is there a field somewhere to do this?  Also, I noticed that there appears to be no Override Option in ATX, so if there is not an easy work-around I will have to send the Software back for a Refund and switch to something else.  If I had filed it as it is, it would be shorting me $239 on my Delaware State Refund and shorting me $118 on my New Jersey State Refund.

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

 

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Since I don't know what you know of DE please forgive me if this is too basic, but the DE 200-02 for nonresidents starts on page 2, col 1 that picks up all of the income from the joint federal return. Column 2 is for the DE sourced income, and you will have to fill in those numbers in ATX manually. Last time I used ATX was in 2011 but this is how I'd have to prepare each client's returns for those that were residents of PA, NJ, or MD and had nonresident DE wages or a PY return.

You shouldn't have too much trouble if the DE return is joint, but you should test it both joint and MFS if both parties have DE source income because DE has a graduated tax rate.  In those cases was filing MFS for DE is beneficial, ATX has always been very fiddly with this because the ATX program can't automatically produce the second return and requires either creating a second return for only the second taxpayer for DE purposes, or like the last time I used ATX was by overriding the second return for everything including names, SSNs, and all of the figures on the split return. If all of the items are coded properly for J, T, or S, you should be able to use the Federal AGI schedule that the program produces and use that for the split amounts.  You have to also go to the DE 200-02 return and actually manually input the filing status to change it away from joint.

Also, I think that unless you are filing the DE on a joint basis, the program may have incorrect figures for the NJ credit with the MFS DE returns unless it will allow you to enter the taxes paid to DE for each of the separate returns on the NJ resident return.

Sorry I can't be more specific as I haven't used the program in several years.

 

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Thanks, Judy.  You started to touch base on my problem, then drifted off a bit.  There are two Columns on the Delaware Return Worksheet, first column and then the second column for Delaware Source Income.  But even the first column should not be pulling in my wife's W-2 Income from the State of New Jersey, since she only lives and works in New Jersey.  When I did it on Pro-Systems F/X Tax earlier this year during Tax Season, it was correct and pulled in the right numbers for my Delaware W-2 Income only for the left column, and a lower number still in the right column for my Delaware Source Income.  I need to go back and fool around with it some more, but at this point I am leaning towards giving up on it and sending it back already for a refund. If it cannot even do my own Return correctly, how can I rely on it to do my Client's Tax Returns?

 I would probably switch to either Pro-Series from Intuit or maybe Drake.  From what you said however, the ATX Program is not smart enough to Optimize someone's Tax Return.  For example, I also did a Church friend's Tax Return Last Year at work on Pro-Systems F/X Tax, and it optimized his return by letting me file him MFJ for Federal and MFS for his Delaware Return, thus giving him a better result for both without having to manually enter the Data twice.

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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I have clients who have as many as seven states and don't have a problem.  You always have to break the portion for the state apart from the Federal total.  You do the separations on the bottom of the W2 information entry sheet.  Then you have to file one Federal return and a resident or non-resident return for each state.  It is hard to generalize the answer for you because every state probably treats these things differently; and then there are reciprocity states.  You seem to be making this harder than it is.  The software will do the work if you enter it correctly.

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I did enter everything correctly at the bottom of the W-2 input screens for the Program and broke out the state income at the bottom like I'm supposed to for both states (Delaware and New Jersey for mine only.)  The problem is that on the Delaware worksheet which feeds into the top line of the Delaware Non-Resident Return, there are two columns, a left column and a right column for Delaware-source Income only.  On my Delaware worksheet done with Pro-Systems F/X Tax, Line 1 at the top on the Left column has about $15,500 and change (this is correct as it is my Delaware W-2 Income) and on the right column of Line 1 for Delaware-source Income, it has a lower number still which is about $11,500 and this is also correct.  Then the numbers carry down the worksheet to the bottom and over to the front page of the Delaware Return.  The problem is that with ATX on my Delaware 2-Column Worksheet, Line 1 of the Left Column at the Top has about $57,500, which is incorrect because it is including my wife's New Jersey W-2 Income which it should not be including.  I have tried to figure out how to change this, but it is pulling this number from Line 7 I believe of the 1040 directly, which it should not be doing.  It does say Federal at the Top of the Delaware Worksheet on the Left Column, but this is also Incorrect.  I cannot figure out how to Edit, Override, Change or Fix this problem.  The more expensive Flagship CCH Wolters-Kluwer Tax Software Pro-System F/X Tax does a much better job and Optimizes the Return by only pulling in my Income from 3 Delaware Temporary and Seasonal Job W-2's without adding in my Wife's New Jersey W-2 Income at the Top of the Delaware Worksheet Left-Hand Column Line 1.  An older, more experienced CPA who I'm going to work for Part-Time this week said he used ATX back in 2004-2005 and switched because he did not like it because he felt it was not Accurate, and he also mentioned that he knew other CPA's who switched because they also felt it was not Accurate enough.  I'm starting to think that ATX might be okay for Non-Licensed Tax Professionals and maybe even Enrolled Agents, but it's not CPA material.  As CPA's, we are much more anal about doing things right and keeping our License because it was so tough to get in the first place.

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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Peter, the Delaware 200-02, page 2, col 1 (the left-hand col) should report ALL income shown on the federal return for that individual if MFS, or all Federal income for both people if filing DE on a joint basis. Column 2 on page 2 is where the DE sourced income is shown.  Delaware changed this years ago to include all of the income and all of the deduction and exemptions on a total basis based on the Federal income in col 1. From there the DE tax is calculated on the total of all income, no matter what state it is from. Only then is the proration calculated for the DE sourced income reported in col 2 as a % compared to the total, and that % is then applied to the tax.  In that way, the income has the potential to be taxed at a higher rate because of the graduated brackets that DE uses.

I can't answer why Pro-System handled it differently, but you should look at the instructions for 200-02 to see that the correct handling is as I've described above. I am a Delaware CPA.

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Here are the instructions. Note on page 4 in red where it says that Col 1 should include all items of income reported on the Federal return as if the taxpayer is a full-year resident of Delaware. Where it says "except for filing status 3" says that because the preparer would be splitting all the Federal items between TP and SP, but still requires that ALL items attributable to that person be included in Col 1 on the DE return.

http://revenue.delaware.gov/services/current_pit/TY09_200-02Instructs.pdf

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1 hour ago, mcb39 said:

I have clients who have as many as seven states and don't have a problem.  You always have to break the portion for the state apart from the Federal total.  You do the separations on the bottom of the W2 information entry sheet.  Then you have to file one Federal return and a resident or non-resident return for each state.  It is hard to generalize the answer for you because every state probably treats these things differently; and then there are reciprocity states.  You seem to be making this harder than it is.  The software will do the work if you enter it correctly.

Preparing DE returns with ATX has always been fiddly, especially when multiple states are involved. It never handled the credits easily and often times required overrides.

I can tell you that Drake handles it easier, once you are used to the input, but it is not for everyone. I have much less forcing of the numbers to get the out-of-state credits to calculate properly with Drake than I ever did with ATX, and I used ATX almost since the beginning up through 2011.  For out of staters needing a nonresident DE return, Drake allows for calculating the joint or split return, but the split is calc'd for only one DE return. In other words, Drake can only prepare one DE return and the preparer still has to create a second return if the spouse also needs a DE return where MFS is more beneficial than joint.

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Thanks Judy.  I obtained my CPA License from Delaware, in fact just got it in the mail last week.  I was working for a Wilmington, Delaware based CPA Firm at the time when I did it using Pro-Systems F/X Tax.  The Managing Partner of that firm actually checked my Return from Pro-Systems F/X Tax and we filed it and I was comparing the ATX Return as I did it to the Pro-Systems F/X Tax Return from my Prior Firm.  Perhaps you are correct and that maybe the ATX version is correct, but I kind of find it hard to believe considering that Pro-Systems F/X Tax is a much more expensive Tax Software Package and is fact CCH Wolters-Kluwers Flagship Tax Software.  I am also surprised if it was wrong that Delaware gave me the much bigger refund $239 more than what the ATX Software says I'm entitled to.  If I could afford it, I would have paid more for Pro-Systems F/X Tax because I used it all through this past Tax Season.  I will look into this further and see what I find.  Thanks for your help and advice!!!

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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Congrats on becoming a CPA.

Again, I can't say why Pro-fx did that, but I'm surprised the partner said it was OK or that DE didn't send a notice. If both you and your wife have DE income, the col 1 of the 2 returns should definitely add up and agree with the Federal income. Perhaps you got lucky and it fell under the radar, but I wouldn't be comfortable filing the return as you described and you may yet receive a notice. 

BTW, I've worked solely in public accounting since 1981 and have been a DE CPA for over 30 years, if that means anything to you.   One cannot rely SOLELY on any program for proper reporting. If the input isn't exactly correct, any program could spew out incorrect reporting. The preparer still has to know that the resulting output is correct.  You'll have to read the instructions I linked to and decide how the income should have been reported.

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Wait, I just re-read your post and I realized you mentioned both people if filing on a joint basis.  That might be the problem, as when I did a Church Friend's Tax Return at work on Pro-Systems F/X Tax, he was in the same situation as me in that he was Married Filing Jointly for Federal, but he worked in Delaware and his wife worked in New Jersey.  I used Pro-Systems F/X Tax and selected MFJ status, but the Program optimized his return by selecting Married Filing Seperately Status for his Delaware State Income Tax Return.  Perhaps this is what I should be doing for my own Delaware State Return, is to file Seperately for Myself but not my wife since she both lives and works in New Jersey.  By filing my Church Friend's Tax Return this way, we received a more favorable result.  But I'm not sure if there is an easy, time efficient way to do this with ATX.

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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ATX produces a schedule of the Federal AGI with a total column for Federal and will show the breakdown by TP and SP. If only you work in DE and your wife has no DE income, then only the person with DE income needs to file a DE return, but the DE return, page 2, col 1 must income ALL of that one person's Federal income. Col 2 will report the DE-source income that will be used to calc the proration % on page 1.  I can tell you almost with certainty that if the person has worked all year in DE with decent income, then it will almost always be beneficial to file the DE return on a MFS basis because of the graduated rates.  Even for residents, this is true, and the only returns I have where it is not beneficial is where one of the person's in the couple has low enough income that the gross tax for that individual is less than the exemptions and other credits where some of that tax benefit of the exemptions is lost by filing MFS. In those cases, the joint calcs must be run to see if the loss of tax benes still outweighs not subjecting the taxpayers to the higher rates in the higher brackets that might result from choosing to file joint.

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I reread your posts. If your wife has no DE income then she doesn't have to file a DE return at all, and if you are the only one with any DE income, you are the only one required to file a DE return. You have the option of filing a joint return for DE or one with only your income on an MFS basis.  If MFS for you alone, col 1 must include all of the income that would be reported on your Federal return AS IF you filed it MFS also. That is where the AGI worksheet is helpful, as a review technique to make sure that all income is accounted for.

 

Edited by jklcpa
fixed a word
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Yes, then it all makes sense now.  So what I really need to do is to figure out the easiest way to file MFJ for Federal with ATX, and then file MFS for my Delaware Return for just myself and only include my Delaware Income, as I had 2 temporary jobs this year and a seasonal job with the Wilmington, Delaware CPA Firm over Tax Season.  My wife has only New Jersey income and we are Pennsville, New Jersey residents.

Do you know an easy way to do this with ATX without having to create a second, brand new return for myself from scratch?

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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ATX should be able to handle that return pretty well.  Input everything and make sure the Federal is correct. Make sure to designate the W-2 income by state as reported on the W-2s. On the DE input, you should find a place to select the filing status of MFS for yourself. The DE 200-02 should be produced with only your items of income, although the front of the return will still show your wife's name and SSN. DE uses that to know that she hasn't had any reportable income for DE purposes.  If you have children or other dependents, you are allowed to give all of those to yourself, but do not include your wife in the number of exemptions on your DE return if filing MFS. ATX does not fill in the # of exemptions automatically on the DE MFS returns for this reason, because the TP and SP may choose to split them in any manner they choose, except that you can't claim your wife if you are filing MFS because each of you claim yourselves.

The program should be able to produce a DE return for only you, and it should put only your DE wages from the W-2 input in col 2 if you've done the input correctly.

On the NJ 1004 input, you'll have to enter the 2-digit abbrev for DE  (I believe the DE abbrev should be "08") to tell the program that you've paid taxes to the State of DE. The program should add the NJ Sch A for the credit for taxes paid to other jurisdictions. I'm not sure if it will pick up the DE AGI and DE taxes or if you'll have to enter those on the NJ input, but that should get you on to the correct path with this. 

Edited by jklcpa
added the DE 2-digit code of "08"
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You might have to override the filing status on the DE to put an "X" in the box for MFS.  If ATX is still like it was in 2011, I always had to override directly on the form by overriding MFJ to be blank and overriding to check the other box. I'm not sure if ATX has added a new way to accomplish this in the last 3 years, but I seriously doubt it since it seems that DE doesn't get much attention from the programmers.

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Thanks again for all of the time you put into this blog post.  I'm not sure how to do an Override in ATX, I did not think that there was an option for that.  I'm still going to call Customer Service tomorrow morning, but in light of what we discussed tonight I do believe there is hope for me in keeping the Program.

Sincerely,

Peter J. Chrustowski, CPA, CGMA, MAFM

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3 hours ago, Peter J. Chrustowski, CPA said:

ATX might be okay for Non-Licensed Tax Professionals and maybe even Enrolled Agents, but it's not CPA material.

Excuse me Peter, but I take that as a slight.  As an EA, I dedicated the same two days of my life to an exam (8AM to 4:30PM), had the four parts scored on the same type of weird scale (1/3 or whatever pass), and have to take the same continuing education (24 hours required by the IRS, 30 by the professional associations; you might have to take more).  The exam has changed some since I took it, but it's still a bear that requires months of study.  Unlike a CPA, all four parts of my exam were devoted to tax.  Only one of your was.  Also unlike a CPA, I am licensed to practice in all 50 states; you can probably practice in one.

I work at a CPA firm.  One CPA gives us most of his tax work to do.  The other does his own tax work but gives me his tough situations, the ones that require legal research or considerable knowledge that takes time and patience to learn and apply.  The CPAs do audit work that I cannot, but that has to do with training and education, not software.  By the same token, they give me their tax work that they cannot or choose not to handle because of my training and education.  I'm glad I work for them and not you.

How can you imply that a software program that doesn't seem to handle multistate issues is "okay" for anyone who does serious taxes?  I guess you don't think EAs do serious taxes.  You are an accountant who also does taxes.  EAs are tax professionals who also do some accounting.

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I am a CPA that has used ATX for 16 years and feel that ATX prepares correct returns for my clients. I prepare returns for many different states and they all are handled differently. You have to read the instructions to make sure that the return is prepared correctly. The state rules often change every year, just like federal taxes. You are able to override many lines by right clicking on the entry and selecting override. I am careful when I do that, because many times, the program is smarter than I am. There are way more expensive programs that will streamline more items and Drake is reasonable with great customer service. By using this website or the ATX website, you can get help from many knowledgeable tax professionals. ATX monitors their website and will help as much as possible.

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On 11/29/2015, 3:26:43, Peter J. Chrustowski, CPA said:

  I'm starting to think that ATX might be okay for Non-Licensed Tax Professionals and maybe even Enrolled Agents, but it's not CPA material.  As CPA's, we are much more anal about doing things right and keeping our License because it was so tough to get in the first place.

ATX is a very high quality tax software program for an EXPERIENCED tax return preparer.  The CPA designation does NOT indicate such experience.  I am seeing statements and questions in your posts that indicate very light experience in preparing personal tax returns.

As an E.A., my studies and testing were 500% more about tax and preparation than the CPA exam.  Your statement is demeaning and condescending.

I would have handled the situation you described in less than 5 minutes by knowing how the return is supposed to be prepared and when it is correct, and making sure the numbers flow and are entered appropriately.  For the record, I live in Ohio (check the name) and do about 5 DE returns a year.  Never have had any issues with multi-state.

 

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Jack is correct in his statement that ATX is a quality product in the right preparer's hands.  Each of the programs the OP mentioned would be able to do this return in question, but each tax preparer must still know the rules and proper reporting of the items on the returns, and should never rely solely on any piece of software to produce a result without knowing when inclusion or exclusion of an item is proper. Relying on any software without knowing what's right or wrong is a crutch to be avoided and will only lead to errors on returns.

Knowledge and experience are equally or more important than the amount of professional credentials or letters one can list after his name.  Still, we all were newbies at one point and had to start from there.  I don't care if it's EA, CPA, RTRP, or whatever...I've seen the good, the bad, the ugly, the unethical, and the incompetent preparers in each of those designations. Over the years I've also seen some bad professionals that must have been good at test-taking, but they surely couldn't apply what they learned.  I've also seen CPAs with MSTs that were excellent and specialized only in the tax area, and other CPAs that worked in audit that couldn't even do the most basic of returns.  I don't think we should make blanket statements about what CPAs can or cannot do, or EAs for that matter, because I've seen the work of some unethical EAs too, so I think we should look at what experience each person brings to the table and go from there.

Thanks, off my soapbox now.

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Because we've hashed some of that out, the topic has now been derailed.  Let's try to get this thread back on track by discussing the ATX handling of this return and its input.  If anyone would like to start a separate topic on the merits of the various professional designations, that would be fine too, as long as it doesn't lead to personal attacks.  Thanks.

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