Double taxation in state tax on Foreign Income

[gur1]

• To avoid double taxation in a federal return we can claim a foreign tax credit on USA federal return

• To avoid double taxation on state tax returns what is the best way? I am not sure if Illinois allows a foreign tax credit

My spouse was not working when she was a resident of IL. In July 2021 she went to CANADA.

Will below help to avoid double taxation on my wife's CANDIAN salary? If yes ,How to file federal tax as married filing jointly and state tax as married filing single using Turbo Tax online 

• Federal tax - married filing jointly. Avoid double taxation by the foreign tax credit 

• State tax -Illinois -Married filing separately

1.    My state return as a resident 

2.     My wife return as a part-time resident -She was in IL till June,22,2021. She was not earning.  This way her Candian income is not taxed by the IL state 

[ErnieS0 · Accepted solution]

Yes, filing a separate state return will avoid double taxation. 

If you file a joint Illinois return, you will have to include your total income on the joint return (including your wife's Canadian income).

Illinois does not allow a credit for Canadian taxes: "Taxes that qualify for the credit are income taxes you paid to another state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States, or to a political subdivision (e.g., county, city, local) of one of these jurisdictions. No credit is allowed for taxes paid to the federal government or to foreign countries or to their political subdivisions."

Schedule CR IL-1040 Instructions 

Married filing separately

You can file a joint federal return (and claim a foreign tax credit or deduction) and file a separate Illinois return.

Follow this link: How do I prepare a joint federal return and separate state returns?

[gur1]

@ErnieS0 Thank you for detail response ! I have one follow up questions. My wife was in IL until June 2021 but she was not working.She started working when she moved to Canada.

Her income while staying in IL is zero .

So does she has to file state tax return for IL ? If answer to question is yes then 

Does it matter if she files as resident or part resident  ? Can her Canadian income taxed by IL if files as resident ? She moved out of IL in June 2021 but she might come back some time around Oct 2022 or later.Is it okay to file as part resident in 2021?

[gur1]

Hi @ErnieS0 

Thank you for your response.I have one follow up question

Thanks for sharing your response

I have one follow-up question.

Part resident in IL has to fill IL 1040 and schedule NR.

Since my wife moved out of IL to CANADA.What should I put in line 4?

https://www2.illinois.gov/rev/forms/incometax/Documents/currentyear/individual/il-1040-schedule-nr.p...

[ErnieS0 · Accepted solution]

Use FN (foreign nation). It's the last choice in the drop down.