Revenue Administrative Bulletin 1990-23

Approved: July 12, 1990

NON-RESIDENT CREDIT FOR TAXES IMPOSED BY STATE OF RESIDENCE

RAB-90-23. This bulletin identifies the states whose residents are eligible for the non-resident credit of MCL 206.256; MSA 7.557(1256) and illustrates the computation of the credit.

Michigan Income Tax Treatment

Non-resident individuals, estates, or trusts may be eligible for a credit for taxes paid to their state of residence pursuant to MCL 206.256; MSA 7.557(1256). This credit is claimed when filing a form MI-1040 or form MI-1041 to report the income taxable in Michigan.

MCL 206.256; MSA 7.557(1256) provides:

1. A non-resident individual, estate or trust shall be allowed a credit against but not in excess of the tax otherwise due under this act for the amount of any income tax imposed on him for the taxable year by the state of residence or subdivision thereof on income from sources herein which is also subject to tax under this act.
2. The credit shall be allowable only if the laws of the state of residence contain a reciprocal provision which allows credits to residents of this state under similar circumstances.

The following states have reciprocal provisions which allow a credit to Michigan residents for income tax imposed by the state on income that is taxable to both states:

            Maryland
            New Mexico
            Virginia
            West Virginia

Thus, for income taxable in Michigan, a credit is allowed on the Michigan return for income tax paid to the states listed above by their residents.

Amount of Credit

The statute limits the amount of the credit to the smaller of the Michigan income tax liability attributable to the income taxable to both states or the state of residence income tax liability attributable to the income taxable to both states. Attach a copy of the state of residence income tax return to the MI-1040 or MI-1041 when claiming this credit.

The following examples illustrate the computation of the non-resident credit.

Example 1

Facts:

Income taxable to Michigan                                             $4,800
Total income taxable to state of residence
(must include income taxable to Michigan)                 $12,000
Percentage of Michigan income to
total income:                                         $4,800 / $12,000 = 40%

Computation of income tax liability:

1. State of residence income tax calculation:                  $12,000
Total taxable income
Less one exemption @ $1,500                                             $1,500
                                                                                        ________________
State of residence taxable income                                    $10,500
State of residence tax
(assume a 5% tax rate)                                                           $525
State of residence tax liability for
income taxable to both states:                         $525 x 40% = $210

2. Michigan income tax calculation:
Michigan income                                                              $4,800
Less one exemption prorated
at 40% of $2,000                                                                $800
                                                                                       ____________
Michigan taxable income                                                $4,000
Multiplied by tax rate                                                          x.046
                                                                                       _____________
Michigan income tax                                                        $184

The taxpayer will be allowed a Michigan income tax credit of $184 for taxes paid to the state of residence. In accordance with MCL 206.256; MSA 7.557(1256), the credit does not exceed the taxpayer’s Michigan income tax liability.

Example 2

Facts:

Income taxable to Michigan                                           $12,000
Total income taxable to state of residence
(must include income taxable to Michigan)              $40,000
Percentage of Michigan income to
total income:                                         $12,000 / $40,000 = 30%

Computation of income tax liability:

1. State of residence income tax calculation:                 
Total taxable income                                                       $40,000
Less two exemptions @ $1,000                                     $2,000
                                                                                     ________________
State of residence taxable income                               $38,000

State of residence tax
(assume a 3.5% tax rate)                                                   $1,330
State of residence tax liability for
income taxable to both states:                        $1,330 x 30% = $399

2. Michigan income tax calculation:
Michigan income                                                            $12,000
Less two exemptions prorated
at 30% of $4,000                                                              $1,200
                                                                                       ______________
Michigan taxable income                                               $10,800
Multiplied by tax rate                                                          x0.46
                                                                                     ______________
Michigan income tax                                                            $497

The taxpayer will be allowed a Michigan income tax credit of $399 for taxes paid to the state of residence. In this example, the credit is limited to the state of residence income tax liability attributable to the income taxable to both states.