How to Avoid Double Taxation on Multi-State Tax Returns
There are four primary methods to prevent double taxation on your state tax returns
- Allocate Income Between States: If you moved during the year, allocate your income to each state based on the time you spent in each. This method works best when your W-2 or 1099 forms correctly reflect income for each state. If your forms are inaccurate or incomplete, we may need to use other strategies, such as credit for taxes paid to other states or state wage allocation.
- Credit for Taxes Paid to Other States: Most states offer a “credit for taxes paid to other states” to avoid double taxation. If your income was taxed by one state (e.g., SC) but you reside in another (e.g., NC), you pay taxes to the source state (SC) and then claim a credit on your resident state return (NC) for taxes paid to SC. However, some states do not allow this credit or require a full-year return if you claim it, so we may need to navigate these requirements carefully.
- State Reciprocity Agreements: Some states have reciprocity agreements that allow you to file only in your resident state. For example, residents of DC and VA do not need to file in both states. Other states with similar agreements include Arizona, Illinois, Indiana, and Maryland.
- Reverse Credit States: In states like California, if you live in CA but work in Oregon, you only pay taxes in your residence state (CA). This approach differs from the typical credit for taxes paid to the income source state.
Note About City Taxes
Cities such as Detroit, New York, and Philadelphia tax based on your residence, regardless of where you earn your income. Credits for taxes paid to other states generally do not apply. If you are affected by city taxes, contact us for specific guidance.