S Corporation shareholder distribution from another state

[ravidavi]

What is the name of your state (only U.S. law)? Maryland
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My wife and I are from Texas, and moved to Maryland (for my work) in June 2012. She is a shareholder in an s-corp in Texas. The s-corp is a brick&mortar business that operates SOLELY in Texas; all revenue is in Texas, all employees live in Texas, and there are no other states involved in any way. The business has existed in Texas for about 5 years now, long before either of us had plans of moving to Maryland. Her participation in the business is mostly as a silent partner now; her only involvement is in major business decisions.

My question is this: Does she suddenly have to pay Maryland state income taxes on her distributions, even though all income/expenses for the s-corp are Texas-sourced?

This seems like a simple question, but I've scoured the entire freaking internet without a clear answer!

Any thoughts are highly appreciated in advance.

 

[tranquility]

Maryland taxes its residents on their income. The K-1 from Texas will be a part of wife's income. The way the state prevents the same income from being taxed twice is to give a credit for taxes paid to other states. Since Texas has no income tax, there is no credit.

Maryland gets to tax the full amount.

 

[LdiJ]

Maryland taxes its residents on their income. The K-1 from Texas will be a part of wife's income. The way the state prevents the same income from being taxed twice is to give a credit for taxes paid to other states. Since Texas has no income tax, there is no credit.

Maryland gets to tax the full amount.

ditto...that is exactly how it works. Its unfortunate for you, but its reality.

 

[davew128]

Its unfortunate for you

I don't even consider it unfortunate.

 

[ravidavi]

Maryland taxes its residents on their income. The K-1 from Texas will be a part of wife's income. The way the state prevents the same income from being taxed twice is to give a credit for taxes paid to other states. Since Texas has no income tax, there is no credit.

Maryland gets to tax the full amount.

Thank you for the explanation tranquility (and LdiJ for the confirmation). I can't say I like the answer, but it is what it is.

davew: It's unfortunate by definition since it's an unfavorable circumstance. I don't believe that a state should be allowed to tax income sourced from physical activity in another state, but that's just a personal opinion, no doubt affected by my current situation. I should've read up on Maryland tax law before we moved here. (Because, you know, everyone has time to read up on the intricacies of a state's income tax laws in the middle of graduating, moving, and starting a new job. )

Thanks again to all! Other thoughts and opinions are always welcomed.

 

[LdiJ]

Thank you for the explanation tranquility (and LdiJ for the confirmation). I can't say I like the answer, but it is what it is.

davew: It's unfortunate by definition since it's an unfavorable circumstance. I don't believe that a state should be allowed to tax income sourced from physical activity in another state, but that's just a personal opinion, no doubt affected by my current situation. I should've read up on Maryland tax law before we moved here. (Because, you know, everyone has time to read up on the intricacies of a state's income tax laws in the middle of graduating, moving, and starting a new job. )

Thanks again to all! Other thoughts and opinions are always welcomed.

Every other state that has income tax (and all but a handful do) is the same, so it really wouldn't have made any difference.

 

[davew128]

I don't believe that a state should be allowed to tax income sourced from physical activity in another state, but that's just a personal opinion

A state CANNOT tax income sourced from physical activity in another state. Read the US Constitution. It CAN however tax the income of its own residents. That's ALSO in the US Constitution.

 

[tranquility]

While constitutional issues, they are hardly "in" the Constitution where a reading is going to answer the question(s).

It CAN however tax the income of its own residents.

Income taxes are not prohibited to the states in the Constitution. The source is the commerce clause for the requirement of the credit. If pass through income were to taxed in other states and residents could not claim a credit, it would discriminate against interstate commerce and be in violation of the commerce clause.

A state CANNOT tax income sourced from physical activity in another state. Read the US Constitution.

This is not quite correct either. If you're talking about nexus issues, while the commerce clause is implicated, the main reason seems to be due process.

 

[davew128]

While constitutional issues, they are hardly "in" the Constitution where a reading is going to answer the question(s).

The commerce clause is in the constitution.

The source is the commerce clause for the requirement of the credit. If pass through income were to taxed in other states and residents could not claim a credit, it would discriminate against interstate commerce and be in violation of the commerce clause.

I never referred to a credit one way or the other.

 

[tranquility]

The commerce clause is in the constitution.

You didn't just say it was in the Constitution, you said he should read the U.S. Constitution implying that would help them understand.

The commerce clause:

To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;

Now, even if one were to read it over and over, how is that going to lead a person to believe:

A state CANNOT tax income sourced from physical activity in another state.