I live in KY and work for a company in CA (I work remotely). I'm not sure why I'm taxed on the refund I receive from CA that I in-turn pay KY state taxes with?

[DanielV01 · Accepted solution]

It depends.  You aren't taxed on the CA refund, but you may have to use that refund to pay KY taxes.  Here is what I believe is happening:

Since you are a KY resident, all of your income is taxed in KY regardless of where you earn it.  It sounds like the company you are working for remotely is not withholding KY tax for you, but they are withholding CA tax.  This, unfortunately, is making you file a CA return in addition to the KY return.  The CA return should be a full refund:  since you are not physically located in California, you are not taxed in California.  There are a few states that treat the telecommuter working for a business location inside of their state as also working inside of the state, but California is not one of them.

Therefore, you will need to make sure you are filing a California nonresident return with zero income, and get the full refund of CA taxes withheld.  Then, you will file the KY return.  You will no doubt owe if the company did not withhold for KY.  Afterwards, you will want to see if they can, so that KY tax is taken out of your check instead of CA tax.  If they cannot, at least have them stop taking out CA tax, and then fill out the information in TurboTax so that you can make state estimated payments, so you do not pay penalties for not paying in enough KY tax throughout the year.

[jericot88]

Thank you for taking the time to answer.

That's exactly what I have to do. I get a refund for the full amount of taxes I paid CA then I turn around and pay KY, with a penalty. Should I be taxed on the full amount I get from CA, even though a percentage went to KY? Or should I only get taxed on the difference?

For instance, lets say I paid 1,000 in taxes to CA in 2017 and 0 to KY in 2017. With my refund I received from CA which was 1000 (for tax year 2017), I paid 900 to KY for 2017 taxes (800 owed to KY for 2017 + 100 penalty). This year, I have the same situation, and I got a 1099-G from CA showing I received a refund of 1000 in 2018 for my 2017 taxes. For my Federal return for my 2018 taxes, should I get taxed for the full 1000 I received from CA or should I only get taxed on the 100? CA Refund (1000) - KY Taxes Due (900) = 100?

[DanielV01]

Thanks for clarifying the question a bit more.  If you itemized, and included the California taxes as part of your deductions last year, you do have to include all 1000 of the refund as potentially taxable this year for Federal.  (If you did not itemize, then you do not need to report it at all).  Then, as part of your itemized deduction for this year (2018), you would include the 800 payment you made to KY LAST year (for 2017, and you  unfortunately cannot include the 100 penalty for this deduction).

This is the way that this portion must be claimed, but, of course, the bad news is that the change in law with TCJA makes it less likely you'll get any benefit from claiming the KY tax you had to repay.  

Having said this, I strongly recommend that you speak to the company and see if they can withhold for KY.  If they cannot, make estimated payments.  In either case, have them stop withholding California.  You are paying those taxes needlessly.

[jericot88]

Thank you for responding. I did itemize, at least I think I did. How can I be for sure?

For entering my 2018 payment, would I enter that under here: Federal > Deductions & Credits > Income Taxes Paid > Other Income Taxes Paid in 2018 > Balance due on your 2017 state taxes paid in 2018 ?

I was entering the 800 amount under the Federal > Wages & Income > Refunds Received for State/Local Tax Returns  > California. I was choosing the "We made our 4th quarter estimated tax payment for our California 2017 taxes after December 31, 2017". Now that seems in correct based on what you said? If I use this route at the end it says the 200 is taxed,etc.

[DanielV01]

Q1:  You have to check your 2017 Form 1040.  If you have either 1040A or 1040EZ, you didn't itemize.  On Form 1040, check line 40.  If you filed as single, and the amount is not exactly $6350, you itemized.  If you filed Head of Household, and the amount is not exactly $9350, you itemized, and if you were Married Filing Joint, and the amount was not exactly $12,700, then you itemized.
Q2:  That is exactly where you will input this information.
Q3:  You are right.  What you were inputting was not correct.  You did not make an estimated payment at all if they were taking the CA tax out of your paycheck.  That box should be blank.

[jericot88]

Thank you so much for the advice and for answering my questions!

[DanielV01]

You're welcome.

[Anonymous]

HI TurboTAxDanielIV  to carry on this conversation, same point above: I live in NV and work remotely from CA. However my employer has my deductions set up with "work on CA" and therefore I am being charged CA taxes. I don't think that is right. What documentation can I provide and prove this is inaccurate and stop withholding CA taxes?

[Anonymous]

HI TurboTAxDanielIV  to carry on this conversation, same point above: I live in NV and work remotely from CA. However my employer has my deductions set up with "work on CA" and therefore I am being charged CA taxes. I don't think that is right. What documentation can I provide and prove this is inaccurate and stop withholding CA taxes?

[JeniW]

Hello, my husband and I have the same situation: worked remotely in Kentucky for a California based employer. CA taxes were withheld and we need to file for a credit to pay KY taxes. What form or how did you file for the CA credit/refund? We are using TurboTax to file this year and want to know which sections this is under of if there is a form to fill out. @DanielV01 @jericot88 

Please help as we are very confused as to what action needs to be taken.

[MarilynG1]

You will need to file a California Non-Resident return and a Kentucky Resident return.

Prepare the CA return first, and Kentucky will ask in the interview about 'tax paid to another state' where you can get credit for tax paid to California. 

Click this link for more info on How to File a Non-Resident State Return.