I am a resident of Arizona but I work in California. Do I need to file to taxes in both states?

[TerryA · Accepted solution]

Yes you do: Arizona, as your resident state, gets to tax your world-wide income. California gets to tax your compensation because it was earned there.

The nonresident TT/Calif will begin to prepare a tax credit for the compensation that both states are taxing to help avoid double taxation. You will likely have to help TT/Calif by entering the amount of AZ income that CA is also taxing (your Calif compensation). Prepare your resident AZ return first, then the nonresident CA return.

In TT/California's Nonresident Adjustments, be sure to only allocate as Calif-source your compensation there. All other income items should be entered as -0- Calif-source.

[grantd5150]

What taxes do I pay if working & living in CA & owning a nonrental home in AZ? (Income ONLY CA - Property is home in AZ)

[Hal_Al]

@grantd5150 

You file and pay only CA income tax, since you (apparently) have no AZ source income.  Just owning a 2nd home in another state doe not subject you to income tax in that state.

[fastlaura]

Doesn't AZ have a tax reciprocity agreement with CA? I understood this to mean an employee who lives in AZ but works in CA doesn't have to file a return in CA.

[TomD8]

@fastlaura --

An AZ resident who works in CA must file a non-resident CA income tax return, reporting the income they earned in CA.  This is in addition to filing their home state AZ return, on which they would report all their income, including that earned in CA.

In this situation, the taxpayer may claim an "other state credit" on their CA return for the tax paid to AZ on the income taxed by both. 

The credit prevents double taxation, which is prohibited by federal law.

In TurboTax, the taxpayer would complete the resident state AZ return first, before completing the non-resident CA return.  This will allow the program to calculate and apply the credit correctly.

[Hal_Al]

@TomD8  Do you know "what's up" with AZ-CA "reciprocity"?

When I "google" it* , It appears that CA residents, who work in AZ are exempt from AZ withholding but AZ residents who work in CA are not.  They will have to file a CA return to get a refund. 

*https://ttlc.intuit.com/turbotax-support/en-us/help-article/state-taxes/states-reciprocal-agreements...

https://support.taxslayerpro.com/hc/en-us/articles/4406708909082-How-to-File-Taxes-in-States-with-Re...

https://tax.thomsonreuters.com/blog/state-by-state-reciprocity-agreements/

*

[TomD8]

@Hal_Al --

CA and AZ do not have reciprocity in the traditional sense.  Residents of those states are not exempt from having to file a non-resident tax return in the other state.

A California resident who works in Arizona may claim exemption from Arizona withholding by filing AZ Form WEC with their AZ employer.  But this does not exempt them from having to file a non-resident AZ tax return if they meet AZ's filing requirements for non-residents.  See page 2 of the instructions for AZ Form WEC:

https://azdor.gov/forms/withholding-forms/withholding-exemption-certificate

CA has no equivalent rule.  AZ residents who work in CA may not claim exemption from CA withholding.  The only exceptions to CA's withholding requirements are listed in Section F of this reference:

https://www.ftb.ca.gov/forms/2024/2024-588-instructions.html

An AZ resident who works in CA is not exempt from having to file a non-resident CA tax return, assuming their income exceeds CA's filing threshold for non-residents.

[Hal_Al]

Although some web sites appear to refer to "reciprocity" between CA and AZ, that doesn't appear to be true. 

What's going on is a reverse (or "contrary") credit. In most states, the resident state gives a credit, on the state tax return, for any tax paid to a non resident state.  CA & AZ have an agreement for the reverse; the non resident state gives you a credit for tax paid, on the same income, to your resident state.  Recognizing this, AZ exempts CA residents from withholding, but CA does not.  An AZ resident working in CA will have to wait for a refund on his non resident CA return.