I live in DC and work in VA and my W-2 includes state income tax paid to VA that I will be getting refunded. How to correct state income tax on fed return?

[DS30 · Accepted solution]

Your federal return should only include your resident state income taxes. So that would be DC state income taxes only.

DC and VA have what is called a state reciprocal agreement. This allows nonresidents to not have state withholding taxes taken out for wages earned in the state.

In order to get the full refund of your VA withholdings, you will need to file a nonresident VA return but report zero "0" income from VA (even though you do have VA wage income). You need to file your VA return this way because DC does not allow a credit for tax paid to a reciprocal state on wages, salaries and commissions. If tax was withheld by a reciprocal state (VA), you must file directly with the state for a refund of those taxes. You may need to mail in this return and include your state W-2 information. You will want to include an explanatory statement with your VA return stating your situation (that your DC employer withheld VA taxes from your wages in error)

You will need to claim the full amount of your VA wages on your DC resident state tax return.

To avoid this issue in the future, you need to file an exemption form with your DC employer. Workers exempt under a reciprocal agreement must complete Form VA-4, Personal Exemption Worksheet, which must be kept on file by the employer.

[Hal_Al]

If you do not itemize deductions,  on the federal return, you do not need to correct it.  

If you do usually claim the state and local income tax deduction, on Schedule A, of your federal return, you have some choices.

Since you actually paid it, in 2018, you are still allowed to deduct it. But, you may have to handle the refund, received in 2019 as taxable income.  You could take the attitude that the VA refund is off set by the 2018 balance due you will pay DC, in 2019 and do nothing.

With TurboTax (TT) on-line  software, there is no way to correct it.  You'll have to use a convoluted work around.

For download (desktop) software, see the following link for how to handle. https://ttlc.intuit.com/community/state-taxes/discussion/excess-state-income-tax-withheld-for-2017-i...

[Risingsunn]

Specifically, to get a refund for VA taxes withheld for a DC resident, you file a 763-S form.  NOT THE non-resident standard 763 form as implied here.