Why was my California Schedule S rejected when we had non-resident income in CA but are residents of AZ where all of our income is taxes. We're being double taxed!!!

[Anita01 · Accepted solution]

AZ does not allow a credit for tax paid to CA, for nonresidents of CA who are AZ residents..  You would have to take the Other State Tax Credit on AC instead of AZ.  This situation is not typical of most states, but AZ has rules about states for which you cannot take this credit in AZ and CA is one of them.

7:09 pm 3/16

Edited to correct 

[wvmrem989]

This is the answer I received:  "CA does not allow a credit for tax paid to AZ, among others. You would have to take the Other State Tax Credit on AZ instead of CA. This situation is not typical of most states, but CA has rules about states for which you cannot take this credit in Ca and AZ is one of them".

If this is correct, why did turbotax complete the California form Schedule S when computing my tax obligation to CA?  Furthermore, if the above answer is actually correct, why didn't turbotax compute a credit to my AZ tax for taxes paid to CA?  I'm still being taxed twice for the same income.  I'm beginning to think that turbotax does not really have much of a handle on how to compute a pretty simple tax return where income is earned in more than one state where one is a non-resident.

[Anita01]

I am so sorry that I read  this in reverse in your original question..  CA does allow you to take the credit, if you are a nonresident of CA and a resident of AZ.  It is AZ that does not allow the credit for tax paid in CA.  I will correct my answer.  What do you mean by Schedule S is rejected?  Do you mean CA rejected your state returrn, with what message?

[wvmrem989]

I received a notice from CA stating that "We disallowed the special credits you did not identify on your tax return.  I was supposed to get an refund of $874.  This amount was reduced by $287 to $587.  The difference is the amount claimed on CA Schedule S for double taxation by AZ.

[Anita01]

It sounds like it has more to do with some kind of identification or title of the credit than the actual credit itself.  You should call the FTB and ask exactly what they want from you to reinstate the credit.

[Anita01]

It's possible they don't understand the source of the income for which you are taking a credit.

[Anita01]

What form did you have that showed CA state tax withholding?

[wvmrem989]

We have a W-2.  CA is reducing our CA refund by the amount of tax attributable to income earned in CA.  In other words we are paying tax to CA AND AZ for the same income.

[mryflyguy]

I'm a CA resident as well and just sold a property that resulted in a 593-C withholding tax from escrow. I chatted with the FTB this morning and think I understand - I need to file a CA 540NR (in addition to AZ) with just the escrow withholding (as a tax payment) and reduce the amount by the amount paid in AZ - this done on CA Schedule S form. Is this correct? when I purchase the additional state (CA in addition to AZ), will Turbotax add Schedule s calculate the amount automatically?