Yes. The credit for taxes paid to a nonresident state can be used on your resident state return. Any income that is received must be taxed by your resident state. When you must also pay tax to another state because the money was earned in that state, the nonresident state wants the tax dollars on those earnings.
To be clear - your statement copied here should end with IA taxable income. "I understand that I should reduce my Fed AGI by the IA portion of the S Corp income when determining my NE taxable income"
The resident state does not want you to pay taxes on the same income twice. For this reason they provide a credit which will equal the lesser of:
- the amount of tax liability that you actually paid to the nonresident state, or
- the tax that would have been charged by your resident state
Be sure to prepare the nonresident state first, then your resident state last.
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