in-20250326-IR-045250124NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE MEMORANDUM OF DECISION: 01-20242198 Individual Income Tax For the 2023 Tax Year HOLDING Individuals showed that they were entitled to a larger tax refund than they originally received from the Department. ISSUE

I. Individual Income Tax – Computation of Taxable Income.

Authority: IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-4-8; IC 6-3.6-2-15; IC 6-3.6-4-1; IC 6-3.6-8-3; United States v. McFerrin, 570 F.3d 672 (5th Cir. 2009); Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); 45 IAC 3.1-1-23. Taxpayers protest the Department’s partial denial of refund on the ground that the Department incorrectly adjusted their return. STATEMENT OF FACTS Taxpayers are a married couple who file their Indiana taxes jointly. They moved to Indiana in the middle of the 2023 tax year. Husband had W-2 income from one job, and Wife had W-2 income from two jobs. Taxpayers filed a tax return with the Indiana Department of Revenue (“Department”) seeking a refund of $3,907. The Department adjusted their return and granted them a partial refund of $1,649. Taxpayers timely protested, and this Memorandum of Decision results. Because Taxpayers waived their right to a hearing, this Memorandum of Decision is written in reliance on the Department’s records and documents submitted by Taxpayers.

I. Individual Income Tax – Computation of Taxable Income.

DISCUSSION Taxpayers argue that the Department incorrectly adjusted their return and denied them overpayment credits to which they were entitled, and they argue that they are entitled to the full refund that they originally claimed. “Tax credits are a matter of legislative grace” and “are only allowed as clearly provided for by statute, and are narrowly construed.” United States v. McFerrin, 570 F.3d 672, 675 (5th Cir. 2009). That is, a statute which provides a tax credit or exemption is strictly construed against the taxpayer. Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). Additionally, “when [courts] examine a statute that an agency is ‘charged with enforcing…[courts] defer to the agency’s reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.’” Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana tax law contained within this decision are entitled to deference. Indiana imposes a tax on “the adjusted gross income of every resident person[.]” IC 6-3-2-1. The tax rate was 3.15 percent in 2023. IC 6-3-2-1(a)(4). Indiana calculates adjusted gross income by starting with a taxpayer’s federal adjusted gross income, and then applying Indiana modifications, including subtracting any Indiana deductions and exemptions. IC 6-3-1-3.5. When a taxpayer becomes an Indiana resident in the middle of a tax year, Indiana will tax “all taxable income after the taxpayer becomes an Indiana resident.” 45 IAC 3.1-1-23(1). This means that Indiana will not tax income that a taxpayer earned outside of Indiana before they became a resident. It also means that Indiana will tax all of a taxpayer’s income, no matter where it was earned, once they have become a resident. Indiana counties impose an income tax on all “local taxpayers.” IC 6-3.6-4-1. A local taxpayer is someone who, on January 1 of the tax year in question, lives in an Indiana county that imposes a local income tax. IC 6-3.6-2-15; IC 6-3.6-8-3(a). If a taxpayer changes residency mid-year, their local income tax liability does not change. IC 6-3.6-8-3(b). In other words, a taxpayer will pay local income tax only to the county where the taxpayer lived on January 1 of the tax year, regardless of whether the taxpayer moves. Employers are required to withhold taxes from wages that they pay to employees and send the withheld taxes to the Department. IC 6-3-4-8(a). Employees who have taxes withheld from their paychecks may claim that money as partial payment of taxes owed, and if more money has been withheld than the employee owed, the Department will refund the difference. IC 6-3-4-8(h). Taxpayers argue that the Department wrongly omitted the income from one of Wife’s W-2s, which caused it to calculate three things erroneously: 1) total income taxable by Indiana, 2) total credits for state and local taxes withheld from their paychecks, and 3) total Indiana taxes owed. Husband’s W-2 lists his income taxable by Indiana as $148,666.14. Wife has two W-2s from two different employers: the first lists her income taxable by Indiana as $51,324.81, and the second lists her income taxable by Indiana as $44,089.47. This means that Taxpayers’ total joint income taxable by Indiana is $244,080.42 — a number which matches neither Taxpayers’ original figure nor the Department’s adjusted figure. Husband’s W-2 reflects that his employer withheld $4,588.38 in state income tax and $1,635.27 in local income tax. Wife’s W-2s reflect that her employers withheld $1,352.47 in state income tax and $472.28 in local income tax, and $1,616.74 in state income tax and no local income tax, respectively. This means that Taxpayers are jointly entitled to a credit for taxes paid of $7,557.59 in state income tax and $2,107.55 in local income tax, for a total of $9,665.14. Again, this total matches neither Taxpayers’ original figure nor the Department’s adjusted figure. Taxpayers owe Indiana taxes on 3.15 percent of their income taxable by Indiana after deductions and exemptions. The Department’s adjusted figures, which Taxpayers do not contest, allow Taxpayers $2,185 in deductions and $1,282 in exemptions. This leaves Taxpayers with an Indiana adjusted gross income of $240,613.42 and, therefore, Taxpayers owe $7,579.32 in Indiana state income tax. Neither Husband nor Wife were residents of an Indiana county on January 1, 2023, so Taxpayers do not owe any local income tax. Taxpayers are entitled to a refund equal to their total Indiana credits — $9,665.14 — minus their total Indiana and local income taxes owed — $7,579.32. This means that Taxpayers are owed a refund of $2,085.82. The Department has already paid Taxpayers a refund of $1,649, so the Department owes Taxpayers an additional refund of $436.82. Taxpayers originally claimed a refund of $3,907, and the Department adjusted their return to allow a refund of $1,649. Taxpayers have carried their burden to show that the Department’s adjustments were incorrect, but Taxpayers have not shown that they are entitled to the full refund that they originally claimed. FINDING Taxpayers’ protest is sustained to the extent that they are owed an additional $436.82 and denied in all other aspects. January 7, 2025 Replaces Finding Document at: New