Time for Iowans to claim refunds for local income taxes paid out-of-state? The U.S. Supreme Court yesterday ruled that Maryland was required to allow its residents credit for taxes paid in other states.
State tax systems normally tax resident individuals on 100% of their taxable income. They tax non-residents on only the share of income apportioned or allocated to the state. In order to keep their residents from being clobbered by multiple state income taxes, the states typically allow them a “credit for taxes paid in other states.” This is, roughly, the lesser of the tax paid to the other state or the resident state tax computed on the out-of-state income.
Maryland failed to allow a credit for taxes paid in other states for the “county” portion of its individual income tax. The U.S. Supreme court ordered Maryland to issue such a credit to the plaintiffs, who had out-of-state S corporation income.
Iowa allows a credit for taxes paid in other states, but does not allow such a credit for taxes paid in municipalities or counties. These taxes can be significant. Many Iowans pay taxes in New York City, Kansas City, St. Louis, or Washington, D.C., for example. Many Ohio municipalities also impose income taxes. While the Supreme Court decision doesn’t specifically address such taxes, the court’s logic that double-taxes discriminate against interstate commerce would seem to apply here. A Tax Analysts article ($link) on the decision notes (my emphasis):
Local governments filed an amicus brief saying Wynne may have implications and that there are many states with long-established tax programs like Maryland’s that do not afford dollar-for-dollar credits to residents for all out-of-state income taxes paid.
That brief identified Wisconsin and North Carolina as states that do not allow a credit against local income taxes, as well as a number of local governments that fail to provide a credit for state taxes paid against local taxes, including Philadelphia; Cleveland; Detroit; Indiana’s counties; Kansas City, Missouri; St. Louis; and Wilmington, Delaware.
I have emailed an Iowa Department of Revenue representative asking how they will respond to the case, and will report whatever I may hear back from them. Meanwhile, taxpayers who extended their 2011 Iowa returns and paid municipal taxes elsewhere should consider filing protective refund claims while their statutue of limitations remains open.
The TaxProf has a roundup of coverage.
Joseph Henchman, A Victory for Taxpayers: SCOTUS Strikes down Maryland Tax Law (Tax Policy Blog). “This is important not just for one Maryland business, but for anyone who does business in more than one state, travels in more than one state, or lives in one state and works in another.”
Howard Gleckman, A Divided Supreme Court Rejects Maryland’s Tax On Out-Of-State Income (TaxVox). “But given the closeness of the decision and the wide gulf between the majority and the minority, today’s ruling may not be the last word in the argument over whether, and how, states can tax out-of-state income.”
Russ Fox, A Wynne for the Dormant Commerce Clause. “This case also highlights the difficulties facing a taxpayer without deep pockets.”
TaxGrrrl, In Landmark Case, Supreme Court Finds Maryland’s Tax Scheme Unconstitutional. “In the end, it all came down to this: “the total tax burden on interstate commerce is higher” under Maryland’s current tax scheme. That double taxation scheme, the Court found, is unconstitutional.”
Kay Bell, Supreme Court tax ruling could cost Maryland $200+ million. Wheneer a taxing authority gets caught imposing an illegal tax, they always moan about how terrible it will be to repay their ill-gotten gains. I’ll give them the same sympathy they typically give a taxpayer who loses a fight with them.
Bloomberg, Iowa Spent $50 Million to Lure IBM. Then the Firings Started. That was $50 million paid by other Iowa businesses and their employees, money they could have used to grow businesses that might not have fled.
Jason Dinesen, Why Make Estimated Tax Payments, Part 2. “Here’s the reason: if you’re fully self-employed, you don’t draw a paycheck in the traditional sense.”
Paul Neiffer, What Runs Through the Estate! “In many cases, the heirs will use the cost basis from grandpa and not pick up the extra cost from mom and dad.”
Robert D. Flach comes through with fresh Tueesday Buzz, including thoughts on the use of the tax law as a welfare program.
William Perez, 10 Emerging Financial Technology Apps with a Tax-Angle
Peter Reilly, Free Kent Hovind Movement Has Big Win. ” Judge Margaret Casey Rodgers has granted Kent Hovind’s motion for a judgment of acquittal on the contempt of court charge that he was convicted of in March.”
Robert Wood, U2’s Bono Sounds Increasingly Like Warren Buffett. That’s OK, pitch correction software can do amazing things.
Andy Grewal, The Un-Precedented Tax Court: Bench Opinions (Procedurally Taxing). “Opinions can’t cause a lot of confusion if no one can find them.”
Martin Sullivan, As in Florida, Rubio Pursues ‘Big, Hairy’ Goals in the U.S. Senate (Tax Analysts Blog).
TaxProf, The IRS Scandal, Day 740. Today’s post is a useful corrective to the persistent scandal denialists.
Not that there’s anything wrong with that. AICPA Wants CGMA Love From the C-Suite (Caleb Newquist, Going Concern).