State income taxes on income earned out of state


D

Drewremedy

Can somebody suggest some states which income tax residents
on income earned out of state WITHOUT credit for income
taxes paid elsewhere.

EG A State X which fully taxes A's earned income in State
Y even though resident A already paid state income taxes to
Y.

Does CA fit this mold?
 
B

Benjamin Yazersky CPA

Drewremedy said:
Can somebody suggest some states which income tax residents
on income earned out of state WITHOUT credit for income
taxes paid elsewhere.

EG A State X which fully taxes A's earned income in State
Y even though resident A already paid state income taxes to
Y.

Does CA fit this mold?
Don't know about CA offhand.

But for NY - check out the Zelinsky(not sure if I'm spelling
the name correctly) case. Its been through several judicial
processes already, with more likely to come.

There are also more NY cases on this subject, with various
different fact patterns.
 
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S

Seth Breidbart

But for NY - check out the Zelinsky(not sure if I'm spelling
the name correctly) case. Its been through several judicial
processes already, with more likely to come.

There are also more NY cases on this subject, with various
different fact patterns.
When I lived in NY and worked in other states, my state
Income Tax return included a credit for the taxes paid to
the other states.

Seth
 
A

A.G. Kalman

Drewremedy said:
Can somebody suggest some states which income tax residents
on income earned out of state WITHOUT credit for income
taxes paid elsewhere.

EG A State X which fully taxes A's earned income in State
Y even though resident A already paid state income taxes to
Y.

Does CA fit this mold?
CA gives its residents tax credits for income tax paid to
the other states except for those where they have the
"reverse rule."

The "reverse rule" is that the state where the CA resident
worked gives the credit. From memory: No credits for
working in AZ, IN and OR. Those states give the nonresident
taxpayer a credit for CA taxes paid on income earned in
their state. This also means that an AZ resident working in
CA could not claim a credit on the AZ tax return but would
claim the credit on the nonresident CA return. There's a
funny rule with VA that involves dual residents that I can't
remember, but effectively if you don't get the credit from
CA, you get it from VA. The net of this is that double
taxation for CA residents is avoided.

CA also gives a credit for taxes paid to American Samoa,
Puerto Rico and the Virgin Islands. Guam uses the "reverse
rule." There's a rule with D.C. that I think is similar to
the one with VA.

Hopefully, Katie Jaques is reading this and will correct me
if I screwed it up.
 
D

D. Stussy

A.G. Kalman said:
Drewremedy wrote:
California regularly breaks the mold - especially now that
it needs money.
CA gives its residents tax credits for income tax paid to
the other states except for those where they have the
"reverse rule."

The "reverse rule" is that the state where the CA resident
worked gives the credit. From memory: No credits for
working in AZ, IN and OR. Those states give the nonresident
taxpayer a credit for CA taxes paid on income earned in
their state. This also means that an AZ resident working in
CA could not claim a credit on the AZ tax return but would
claim the credit on the nonresident CA return. There's a
funny rule with VA that involves dual residents that I can't
remember, but effectively if you don't get the credit from
CA, you get it from VA. The net of this is that double
taxation for CA residents is avoided.
Correct for VA as to applying a "reverse credit." However,
I don't believe that residency is necessary. I have only
seen that situation once - for a multi-state worker who also
had credits to "normal" states on the CA return.
 
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K

Katie Jaques

Can somebody suggest some states which income tax residents
on income earned out of state WITHOUT credit for income
taxes paid elsewhere.

EG A State X which fully taxes A's earned income in State
Y even though resident A already paid state income taxes to
Y.

Does CA fit this mold?
Well, I thought I had written a lengthy (probably TOO
lengthy <G>) response to this, but it seems to have gone
into a black hole somewhere ....

Now why would you suspect that CA wouldn't allow credit for
taxes paid to other states?? CA gets SUCH a bad rap ....

Fact is that EVERY state that imposes a comprehensive
individual income tax allows its residents credit for taxes
paid to other states. However, there are some limitations on
those credits.

About 14 states, including CA, allow credit to a resident
for taxes paid to another state on income that has its
source in the other state. States do disagree, however, on
the definition of source income, and as a result two states
may consider the same item of income to be sourced
differently.

The Zelinsky situation in NY, to which Ben referred, is an
example. The NY Court of Appeal (highest court in NY)
recently upheld, again, the long-standing NY regulation that
considers income earned by a nonresident by performing
services at his out-of-state home to be NY source income if
the employee EVER visits his employer's NY office during the
taxable year, UNLESS the services were performed at the
employee's home out of NECESSITY (in other words, there is
NO PLACE ELSE where that job can be done) and not for the
convenience of either the employer or the employee. Now, CA
considers income from personal services to have its source
where the services are performed. So a CA resident who
telecommutes from home, working for a NY employer, would be
subject to NY tax on all of his compensation if he spent any
time at all in NY. But CA would allow him credit for the
tax he paid to NY ONLY on the portion of his compensation
that was earned by performing services in NY. The portion
that was earned by performing services at his home in CA is
CA source income by CA's lights, and no credit would be
allowed for the tax paid to NY on that income.

There are other hitches in the other state tax credit
scenario. Timing can be an issue; if an item of income is
taxed by the nonresident state in a different year, the
resident state may not allow a credit for the tax. An
example would be an installment sale where the taxpayer
"elected out" for state purposes and paid tax to State A in
the year of sale, then moved to State B and collected on the
sale (an installment sale for federal purposes). State B is
likely not to allow credit in the year of recognition for
the tax that was paid to State A in the year of the sale.
(The FTB staff has proposed and is working on a regulation
that would allow credit to CA residents in such situations.
See, they're not such bad guys <G>.)

Another issue came up on this board recently, where two
states (I think it was Ohio and Indiana) had a reciprocal
agreement under which a resident of one state working in the
other would be taxed only by the state of residence. The
Indiana resident employee's Ohio employer mistakenly
withheld Ohio tax on his wages. As a result he is
overwithheld for Ohio and underwithheld (and subject to
penalty) for Indiana. The preparer wondered if he could
just go ahead and pay the tax to Ohio and get credit on the
Indiana return. Alas, an Indiana regulation denies the
credit in that situation. He can only get the money back
from Ohio, not from Indiana.

As someone else mentioned, there are states that stand in a
reverse credit relationship to one another, whereby the
source state rather than the residence state allows the
credit. California, Arizona, Oregon, Virginia are examples.
If you live in one of those states and work in another of
them, you get the credit from the state where you work, not
the state where you live. It's sort of equivalent to the
reciprocal agreement, e.g. the Ohio/Indiana agreement
referred to above. It's a question of which state gets to
keep the tax. In the usual situation, the residence state
cedes the tax to the source state by allowing the credit.
In the reverse credit situation, or the reciprocal agreement
for employees, the source state cedes the tax to the
residence state.

So ... no, there are NO states that categorically deny
credit for taxes paid to other states. But the credit is
not always available, for various reasons, and it appears
that such credits are a matter of legislative grace and not
of constitutional necessity.

Katie in San Diego

The foregoing is intended for educational purposes only and
does not constitute legal or professional advice.
 

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