I've seen that State Z lists State X as a state that it has a reciprocity agreement with, but State X doesn't list State Z as such.
We'd love to help you complete your tax return, but need more information. Every state handles income differently. We can't answer your question without knowing what states you are referring to.
Reciprocity agreements are both ways. They do not cover interest, only wages.
For a listing of agreements see: Which states have reciprocal agreements?
Hi @ErnieS0, states involved are AZ and CA. Financial institution with the account earing interest is in CA. I adjusted the personal info in the Federal return and to more accurately describe our scenario and now it shows up in both. Of course now I'm wondering whether I should be reporting the full amount for both our accounts (one only earns interest on money earned by me and the other only by my spouse—one of us solely has AZ income and the other solely CA income, but both CA and AZ are community property states) to both states or something else as you stated that reciprocity doesn't cover interest on savings accounts?
The reciprocity between Arizona and California covers all forms of income. It's actually a hybrid reciprocal arrangement known as reverse-credit states. When two states can both tax the same sources of income (for example, the income earned in a non-resident state), usually the resident state provides a credit for the income that is earned and taxed in the nonresident state. With a reverse-credit arrangement, it is the opposite. You will be taxed on all of your income in the resident state first, and then the nonresident state will allow you to claim a credit for the income on the nonresident state's tax return.
From your post you and your wife seem to be residents of Arizona (but if not, then just substitute California for Arizona and Arizona for California). If so, you first prepare the Arizona return to determine Arizona tax on all of your income. Your Arizona tax will be any AZ tax withheld minus any refunds or in addition to any additional tax you must pay. You will have to prorate the tax to the amount of income taxed by California (divide California income by total Arizona gross income, and multiply by the Arizona tax figure above). After finishing the Arizona return and navigating into the California nonresident return, you will eventually come to a screen that discusses tax credit for taxes paid to another state. You will fill this screen by mentioning how much income the other state taxed (the California income you calculate), the state taxing the income (AZ) and the amount of tax (the prorated amount you calculated above). California's credit will be the lower of how much California taxes the income or how much Arizona taxes the income. For this reverse-credit arrangement, the source of the income does not matter.
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