My daughter lives in Virginia and works in DC. They took taxes out in DC. I'm filing state returns for both Virginia and DC. When I run the review for Virginia, it tells me the DC is not a valid state code for schedule OSC. If I take it out, it gives me an error. Please explain how I fix this problem. Should she start having her employer pay Virginia state taxes instead of DC state taxes?
Yes. Your daughter should have Virginia tax withheld instead of Washington D.C. tax. Fill out a VA-4 Form.
Washington D.C. has a reciprocal agreement with the rest of the states. Only D.C. residents pay D.C. income tax. Everyone else files a state tax return with their resident state and only pays tax to their home state.
TurboTax is giving you an error because you are not entitled to a other state credit on the Virginia return. Delete the credit.
Instead, file a nonresident D.C. return and tell TurboTax you want a refund of D.C. tax. Your daughter will get back all D.C. tax withheld, but will owe Virginia since her employer should have withheld VA tax.
In the D.C. section you will see a screen Nonresident Request for Refund. Select Yes, I want to file a Nonresident Request for a Refund and answer the questions.