Remote work in Colorado by spouse full year residents of Arizona

[jrtjr]

My wife and I live in Az. I work in Az and the wife works remote for a Colorado employer. No part year status is involved. We are full year residents of Az. Turbotax Az state version is taxing me on both incomes for some reason. It is pulling income from my federal form 1040 even though it has withholding marked for the appropriate states. I can't figure out how to enter only the Az wages on the Az program. Colorado Turbotax although it uses our Federal 1040 it is taxing for only my wife as it should. So the Az software is calculating income on both incomes and the Colorado software is taxing the wires income. 

[MaryK4]

Arizona residents are taxed on all income regardless of where you earned it.  If you paid state taxes to Colorado, you would receive a credit for the taxes paid to another state.  However, if your wife worked in Arizona, she would not be required to pay taxes to Colorado.   

[jrtjr]

How do I navigate this credit from Colorado?

[JohnW152]

Please clarify -- was there Colorado tax withheld (see boxes 15 - 17) on your wife's Form W-2?   

Was her address on the W-2 shown as Arizona?

[jrtjr]

As of yet, we have not received the actual paper W-2. I am going off of prior years assumption, prior years w-2 and mailing address with the payroll accountant, and the paystub provided by her small business employer that wages were reported to Colorado and the address is an Arizona address. We reported residency for all of last year in Colorado and did Federal and Colorado taxes for the full year of 2024.  We are claiming full year residency this year in Az. Her employer is not licensed in Az and doesn't have an EIN in Arizona in which to pay payroll taxes / withholdings to AZ. 

I wasn't able to find the Co form 104cr in the Colorado Turbotax but I did find Az form 309 in the Arizona turbotax that appears to credit me back for the double taxation. So the credit is coming from Az not Co. Please advise. Thanks

[TomD8 · Accepted solution]

If you and your wife were full-year residents of AZ in 2024, then both your incomes are fully taxable by AZ, regardless of where the incomes were earned.

If she never physically worked within CO, then her work income is not taxable by CO.

If she did work 100% remotely from AZ, and her employer mistakenly withheld CO taxes, then you can file a non-resident CO tax return on which you show the withholding but claim zero CO income, in order to obtain a full refund.