If you live in one state but work or earn income in another, you might face income taxes in both places. To prevent double taxation, most states allow a credit for taxes paid to another state. This credit ensures you only pay the higher of the two states’ tax rates, not both in full.
This guide explains who qualifies, how to calculate the credit step by step, and what documents you need to claim it.
What Is the Credit for Taxes Paid to Another State?
The credit for taxes paid to another state is a provision that lets residents reduce their home state’s income tax bill by the amount of tax already paid to a nonresident state.
- Purpose: Prevents the same income from being taxed twice.
- Applies to: Wages, business income, capital gains, and other taxable income earned outside your resident state.
- Important: It only applies to state income taxes, not local or city taxes.
Who Qualifies for This Credit
- Full-year residents: If you live in State A but earned taxable income in State B.
- Part-year residents: If you moved during the year and paid tax in both states.
- Remote workers: If your employer withholds taxes for the state you physically worked in.
- Business owners: If your business operates across state lines and pays state-level taxes.
👉 Reciprocity agreements may eliminate the need for this credit. For example, if your state has a reciprocal tax agreement with a neighboring state, you may only owe taxes in your resident state.
Formula: How to Calculate the Credit
Most states use the lesser of two amounts formula:
Credit = Lesser of:
- Tax actually paid to the other state
- Tax your home (resident) state would charge on that same income
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Step-by-Step Calculation
Step 1: Gather Documents
- W-2 or 1099 forms
- Nonresident state tax return (showing actual tax paid)
- Resident state return forms
Step 2: Identify the Taxable Income
Find the portion of income taxed in both states.
Step 3: Compute the Other State’s Tax
Use your nonresident return to see how much tax you actually owed (not just withheld).
Step 4: Compute Your Home State’s Tax on the Same Income
Apply your resident state’s rates and rules to that income.
Step 5: Take the Lesser Amount
Your credit is whichever is smaller—tax paid to the other state or your resident state’s tax liability on that income.
Example Calculation
- Resident: New York
- Nonresident: New Jersey
- Income taxed in NJ: $50,000
- Tax paid to NJ: $2,000
- NY tax on that $50,000: $2,400
Credit = Lesser of $2,000 or $2,400 → $2,000
You claim a $2,000 credit on your NY return.
State-by-State Variations
- Some states cap credits: A few states limit the maximum credit.
- Employee contributions: Some states (e.g., PA, NJ) may handle this differently.
- Foreign countries: Some states allow credits for taxes paid outside the U.S., while others do not.
Documentation & Filing
To claim the credit, you usually need:
- Resident state credit form or schedule (varies by state)
- Copy of your nonresident state return
- Proof of tax payment (withholding statement or return transcript)
Common Mistakes to Avoid
- Using withholding instead of actual tax owed when calculating the credit.
- Forgetting to adjust after receiving a refund from the other state.
- Claiming credit for local or city taxes, which usually don’t qualify.
- Ignoring part-year rules when moving mid-year.
Tools to Estimate Your Credit
Instead of doing the math by hand, you can use an online tool to estimate how much credit you’ll get.
👉 Try the State Tax Estimator to quickly calculate your credit for taxes paid to another state and plan your return more accurately.
FAQs
Do all states allow this credit?
Most do, but rules and formulas vary. Always check your state’s Department of Revenue.
Can I get a refund if the other state’s tax was higher?
No. The credit only offsets your home state tax, it won’t generate an extra refund.
Does the credit apply to local taxes?
Generally no. It usually applies only to state-level income tax.
What if I paid taxes to multiple states?
You may need to file separate calculations for each state.
Do reciprocity agreements affect this credit?
Yes. If your states have reciprocity, you usually won’t need to claim this credit.
Robert is the creator of StateTaxesEstimator.com, a trusted resource dedicated to helping users accurately estimate their state taxes. With a strong focus on clarity and precision, Robert combines expert knowledge with practical tools to simplify complex tax calculations. His mission is to empower individuals and businesses to make informed financial decisions with confidence and ease.