State tax filing

Yes, there can be a difference.  A credit reduces tax dollar for dollar and a deduction reduces income before applying the tax.  The income reduction method is definitely easier and, depending on income level, there may not be a significant difference.

Check your California (CA) return before filing to be sure.  See the information below for the CA return instructions.

• Per CA FTB 540 Instructions for CA specific instructions. 
  • Claim of Right
    • If you had to repay an amount that you included in your income in an earlier year, because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount repaid from your income for the year in which you repaid it. Or, if the amount you repaid is more than $3,000, you may take a credit against your tax for the year in which you repaid it, whichever results in the least tax. 
    • If the amount repaid was not taxed by California, no deduction or credit is allowed.
      • Social security benefits are not taxable by California and the repayment would not qualify for claim of right deduction or credit. If you deducted the repayment of Social Security benefits on your federal tax return, enter the amount of the federal deduction on line 16, column B. 
    • If you claimed a credit for the repayment on your federal tax return and are deducting the repayment for California, enter the allowable deduction on line 16, column C.
    • If you deducted the repayment on your federal tax return and are taking a credit for California, enter the amount of the federal deduction on line 16, column B. 

To help you determine whether to take a credit or deduction, see the Repayment section of federal Publication 525, Taxable and Nontaxable Income. Remember to use the California tax rate in your computations. If you choose to take the credit instead of the deduction for California, add the credit amount on line 88, the total payment line, of the Form 540. To the left of the total, write “IRC 1341” and the amount of the credit.

@mostasha