Q. Is this considered "withheld in error"?
A. Yes. You should be able to file a non resident MD tax return and get a full refund. The statement "Currently MD has declined to refund me for last years witholdings" is VERY surprising. Did you actually file a MD return or did you try to get the refund by some other method?
If there's something new going on here and you do have to pay MD income tax, you claim a credit, or partial credit, for that on your NY return. There is usually little or no actual double taxation.
______________________________________________________________________________________________
The general rule is: your report all your income on your home state return, even the income earned out of state. You file a non-resident state return for the state you worked in and pay tax to that state. Your home state will give you a credit, or partial credit, for what you paid the non-resident state. You will have to file a non resident MD state return and pay MD tax on the income earned there.. You will also file a NY full year resident return and calculate tax on ALL your income. NY will give you a credit, or partial credit, for the tax you pay MD. So, there will be little or no double taxation, but you have the cost and hassle of filing two state returns. Do the nonresident state return first.
