Two states both taxed me — how do I claim the credit so I'm not double-taxed?
Claim the credit for taxes paid to another state on your resident-state return. This is the standard mechanism that prevents the same dollar of income from being fully taxed twice: your resident state taxes your worldwide income, and it gives you a credit for the income tax you paid to the other state on the same income. Two rules govern whether it works: file the nonresident state first, and know the credit is capped.
File in the right order
You can't claim the credit until you know the final amount of tax you actually paid to the other state — which you only know after completing that return. So:
- First: the nonresident (or part-year) return in the state where you earned the income. Finish it, find the exact tax owed/paid.
- Second: your resident-state return, where you claim the credit for the tax paid to the other state.
Filing in reverse — claiming the credit before the other state's tax is finalized — is the most common way people botch this. If the other state's number changes later, the credit changes too.
How the credit is limited
The credit is the lesser of:
- the tax you actually paid to the other state on the doubly-taxed income, or
- your resident state's tax on that same income.
Worked example: you paid $5,000 to State A on $50,000 of wages, but your resident State B would have taxed that $50,000 at only $4,000. Your credit is $4,000 — the excess $1,000 is not refundable and not creditable. This cap is why the credit doesn't always eliminate double taxation completely.
| Rule | Detail |
|---|---|
| Where claimed | Resident-state return (e.g., California Schedule S with Form 540) |
| Which taxes qualify | State-level net income taxes only — not local/city taxes, not franchise, excise, or gross-receipts taxes, not foreign taxes |
| Filing order | Nonresident state first, resident state second |
| Cap | Lesser of tax paid to the other state vs. resident-state tax on the same income |
| No-tax home state | If your resident state has no income tax (TX, FL, WA...), there is no credit — the other state's tax just stands |
California-specific notes
California's "Other State Tax Credit" (Revenue & Taxation Code §18001) follows the same lesser-of rule. Keep a copy of the other state's return and proof of payment — FTB regulations require receipts and a copy of the return on which the tax was assessed to be available when the credit is claimed, and the credit isn't allowed until the other state's tax is actually paid. Taxes paid to a locality (like New York City's income tax) don't qualify for the state credit.
Frequently asked questions
My employer withheld tax for a state I barely worked in. Do I still need all this?
If you had income sourced to that state, file the nonresident return — even if only to get the withholding back. Then claim the credit on your resident return for whatever tax legitimately stuck there.
I moved mid-year. Does the credit work for part-year filers?
Yes, but you must prorate carefully: the credit applies only to income taxed by both states. Part-year residents allocate income between states first (see our guide on mid-year moves), and the credit covers only the overlap. Misallocating the overlap is a frequent audit trigger.
Can I claim the credit for taxes paid to a foreign country?
No — the state credit covers only U.S. state taxes. Foreign taxes are handled separately on your federal return (foreign tax credit or deduction).
Sources
- https://bbs.fcgvisa.com/t/credit/50766
- California Revenue & Taxation Code §18001; FTB regulation 18001-1 (ftb.ca.gov)
- FTB Form 540 Schedule S instructions (ftb.ca.gov)