Posted by Fred Lake

Credit For Taxes Paid To Another State: How does it work?

Credit For Taxes Paid To Another State: How does it work?

Taxpayers can take the credit for taxes they paid to another state on a Part-Year or Nonresident return only if the wages that were actually taxed by another state is included to the income that is being reported as taxable to the state.

Let’s take a look at this example for a better understanding:

You made a total amount of $30, 000 in wages for the year as shown on your W-2. The  $30,000 as listed in the state section of your W-2 is being taxed by GA while AL is taxing $5,000. This means your GA wages includes your income that was actually gained in and taxed by AL. Therefore, his GA return will show that the income that is taxable to and taxed by another state is included to the income that is reported as GA source income and that is utilized to figure the correct percentage for your GA tax liability. You will be allowed to take the credit or taxes paid to AL on his GA return since the amount used to figure your GA percentage includes income taxed by a different state.

Reporting $30,000 of your income during the year and reporting all $30,000 as taxable on your GA return is the only reason why you can take this credit. There are states that require employers to include all your income on your W-2 but all of the income isn’t taxed by the state. The Form W-e lists it and you can only take this credit if the amount listed is actually taxed by the other state.

Entering the Amount the For the Amount of Taxes Paid to the Other State

The amount that you withheld by the other state is not the amount of tax that you report as being paid to the other state. The amount of tax that is calculated on the other state return is the amount you should use. In order for you to view the amount of tax, you must first view the PDF of your other stat’s return before you enter the amount. You can’t just report the amount that you had withheld. 

Here’s an example:

If you filed the other state return while withholding $1,000 during the year and received a refund of  $250, you technically just paid  $750 as the amount of tax that you actually paid to the other state. On the other side of the coin, if you filed the other state return and end up owing an additional $150 while withholding $1,000, an amount of $1,150 is what you paid to the state.

You may be able to take a larger or smaller credit that you are actually entitled to if you reported the amount you had withheld from a W-2 as an example.

How to Correctly Figure Your Credit

To make sure you correctly figure your credit and receive the correct amount you need to actually prepare and view  your other state. That’s only if you are maually entering your credit for taxes paid to another state.

When Not to Take Credit for Taxes Paid to Another State on a Part-Year State

The income that was earned in the state is generally by Part-Year returns to calculate your taxes. As you can see, it’s different from resident returns where your tax is generally calculated based on all of your income regardless of where you earned it.

As previously mentioned, some Part-Year state returns start by calculating the total tax on all of your income. Then, the percentage of your total income that was actually earned in the state is being used to calculate your actual tax. Generally, you won’t be able to take credit for the taxes you paid to another state since he result is a tax amount that is based only on the amount or percentage of income that was gained in the state and not actually based on your total income.

It’s important to remember that generally, this credit does not become a credit because you paid taxes to another state. Its purpose is generally to reduce a tax liability that is calculated based on incoome that was taxed by another state.

Fred Lake
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