Maximizing Tax Benefits: Reverse Credit for Taxes Paid to Another State

When it comes to filing taxes in multiple states, you may be eligible for a credit for taxes paid to another state, preventing you from being taxed by multiple states on the same income. However, some states go a step further and offer a unique provision called a “reverse credit”, which allows nonresidents earning income within their borders to claim a credit for taxes paid to their state of residence on the same income. Several states have adopted this reverse credit approach, including California, Arizona, Washington DC, Illinois, Indiana, Iowa, Kentucky, Maryland, and Michigan.

Each state has its own specific guidelines for providing reverse credit, and it’s important to understand the provisions in each state. For instance, if you are an Oregon resident filing a nonresident tax return with states like Arizona, California, Indiana, or Virginia, Oregon does not provide a credit for double-taxed income on its resident tax return. In such cases, you must claim a credit for taxes paid to Oregon on your nonresident tax return in the respective state.

To claim the reverse credit in California, for example, you would use Schedule S when filing your personal income tax return. This schedule allows you to claim a credit against your California tax for the net income taxes imposed by and paid to another state. It’s important to note that a claim for credit of income tax overpayment to another state must be filed within one year from the date the tax was paid.

The reverse credit applies not only to individuals but also to estates, trusts, resident beneficiaries of estates and trusts, partners of partnerships, members of limited liability companies classified as partnerships, and shareholders of S corporations.

If you are unsure about how to claim credits for taxes paid to another state or navigate the complexities of the reverse credit provisions, the experts at Dimov Tax are here to assist you. We can explain how the process works and take care of all the filing on your behalf. Feel free to reach out to our team at any time, and we will ensure that you maximize your tax benefits and stay compliant with the regulations of reverse credit states.