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Why Does Income From a Non-Income Tax State Get Taxed On My State Return?

    I am expanding on Example Two to note the fact that Oklahoma's part-year resident return will take your Texas income into account, even though technically only Oklahoma income is being taxed; this is commonly referred to as "apportionment".  (Though this discussion is limited to Oklahoma, many states require a similar apportionment on their nonresident and part-year resident returns.  For example, my own state of Arkansas has a similar apportionment scheme.)

    Your Oklahoma return will start with both your Federal AGI (worldwide income, including Texas) and the portion of Federal AGI subject to Oklahoma tax (figured on a separate schedule) -- in this case, her income while an Oklahoma resident.  After certain adjustments to both AGI columns required by Oklahoma law (i.e., Oklahoma taxes out-of-state municipal bond interest but not U.S. Treasury interest, Social Security and certain pensions), your standard or itemized deductions, personal exemptions, tax, and child care credit are figured based on worldwide AGI (i.e., Federal AGI after adjustments).  The result is then multiplied by Oklahoma AGI as a percentage of worldwide AGI (both after adjustments) to determine your actual Oklahoma tax liability.

    As a result of Oklahoma's apportionment scheme, though technically only your Oklahoma income is being taxed, your worldwide income (including Texas) is used to determine the effective tax rate on your Oklahoma income.

    For more specifics on Oklahoma's apportionment scheme, see the instruction booklet for 2013 Oklahoma non-resident & part-year resident returns (including blank forms) at http://www.tax.ok.gov/IT2013/511NRPkt.pdf .