When more than one state taxes the same income, you may be eligible to claim a Credit for Taxes Paid to Another State. This credit is typically claimed on your Resident state return for taxes paid to a Nonresident state.
Most resident states tax your Federal Adjusted Gross Income (AGI), including income earned in other states. Because of this, the income you earn and are taxed by another state may also be taxed by your resident state—creating double taxation. The credit exists to prevent that.
Credit Availability
You can usually claim this credit only on your Resident state return.
You may claim the credit only when:
- The income taxed by your resident state includes income also taxed by another state.
- The other state assessed an actual tax liability on that income (not just withholding).
Each state has its own rules, including reciprocal agreements that may eliminate the need to file in the nonresident state and, therefore, the need to file the credit.
Please review the specific KB article for your state before proceeding.
How the Program Calculates the Credit
If you are preparing both a Resident and Nonresident return in the program:
Automatic Calculation
- If you file a Resident return and the other state returns are Nonresident, the program will automatically calculate the credit.
Manual Entry Required
You must manually enter information if:
- You want to claim the credit for Part-Year state returns.
- You want to claim the credit on Nonresident or Part-Year returns (rare and usually not allowed).
- You need to adjust the credit based on the actual tax calculated on the other state's return.
The program does not automatically calculate this credit for Nonresident or Part-Year returns because it is rarely applicable to those return types.
How to Manually Calculate the Credit (If Required)
To calculate the correct credit amount, you must know the actual tax liability from the other state's return.
Important:
Do NOT use the amount of tax withheld in the other state (e.g., from your W‑2).
Use the actual tax calculated on the other state's tax return.
Steps:
- Prepare the return for the other state.
- View the PDF of the completed return to locate the actual tax liability.
- Use that amount when entering the credit information manually.
How to View the PDF:
- Go to Summary/Print.
- Select Print/View – choose print state.
- Choose Print your 20XX return to open the state return PDF.
Example: Correctly Determining the Tax Paid
- You had $1,000 withheld for the other state.
- After filing that state's return:
- If you receive a $250 refund, your actual tax paid is $750.
- If you owe an additional $150 instead, your actual tax paid is $1,150.
Using the withholding amount alone may result in a credit that is too large or too small, which can cause errors on your resident return.
Why Withholding Should Not Be Entered
The credit is based on actual tax paid, not prepayments. Withholding may not match the final tax liability after completing the other state's return.
Reciprocal Agreements (Important Exception)
Some states have reciprocal agreements that allow residents of one state to work in another without being taxed by the work state on wages. Because the nonresident state does not tax the income under a reciprocity agreement, no credit for taxes paid to another state should be taken.
If your resident state has a reciprocal agreement with the state where you worked:
- The nonresident (work) state should not assess tax on your wage income.
- If tax was withheld in error, you must file a Nonresident return for that state to request a refund of the withholding.
- The Resident state return should not claim a credit for taxes paid to the other state.
- If the program automatically calculates a credit anyway, you must manually remove the credit amount to avoid errors.
Because reciprocity prevents double taxation at the source, the credit is not applicable in reciprocal-agreement situations.