The best way to explain how the tax credit works (taxes paid to another state on the same income) is shown below. Prepare your nonresident state return first, then prepare your resident state return.
If your resident state tax is a higher rate, then all of the tax paid to the nonresident state will be applied. If the nonresident state tax withholding is at a lower rate than your resident state you will make up the difference when all the calculations are complete. In reverse, if the state withholding on your nonresident state is at a higher rate than your resident state, you do not get the difference refunded unless the withholding was more than you tax liability for that nonresident state. Your resident state will not refund any money they never received. The notes below will explain how it works.
The credit for taxes paid to another state on the same income is used on your resident state because they do not want you to pay taxes twice on the same income. As the resident state all worldwide income must be included.
The credit for tax paid to another state on the same income will be the lesser of:
- the tax liability actually charged by the nonresident state, OR
- the tax liability that would have been charged by your resident state
If you don't have tax in one of the states, then there is not going to be a credit for that state. Review the link below if you have questions about a particular state. You can also add any question here as you start to prepare your state returns.
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