Credit for Taxes Paid to Another State (code 17)

A Utah resident or part-year resident whose income is taxed by Utah AND another state(s), the District of Columbia, or a possession of the United States, may be entitled to a credit against Utah income tax for the amount of tax paid to the other state(s).

Part-year residents will rarely qualify for this credit, as Utah and other states apportion income and only tax the income earned while a resident of that state. To qualify, the income must be:

• Taxable in Utah;
• Taxed by another state(s); and
• Included in “Column A – Utah Income” on form TC-40C.

It is important to remember the credit only applies to the portion of your income taxed by both states.

Tips

• You must complete the income tax return of the state for which you are claiming this credit to determine the actual taxes paid to that state. If the other state's return is not completed, you cannot claim this credit.
• Part-year residents must pro-rate the tax paid to other state(s). Compute the tax credit using only the income that was taxed in both states.

Common errors made by taxpayers who claim the credit

1. Claiming the withholding amount reported on a W-2 as taxes paid to another state. The amount reflected on the W-2 is income withholding taxes based on wages earned by an employee and is only a prepayment of income taxes. The other state's return must be completed to determine the actual amount of taxes paid. Available deductions, exemptions, and credits could result in a taxpayer owing no taxes or an amount less than the taxes withheld from the employees wages. In this case all or part of the prepayment amount would be refunded to the taxpayer.
2. Claiming credit for taxes, other than income taxes, paid to another state. Examples of other taxes erroneously claimed are property taxes, sales and use taxes, and corporate taxes. The credit only applies to income taxes paid to another state.
3. Claiming the entire amount of tax paid in another state.
   1. You must prorate the amount of the credit to reflect the actual tax paid that applies only to the taxable income that is taxed by both Utah and the other state.
   2. The prorated tax is calculated on the net tax after any credits allowed by the other state have been applied.

Examples

Part-year residents will rarely qualify to take this credit. To qualify, the same income must be taxed by Utah and another state. Normally, the income earned by a taxpayer in another state before becoming a Utah resident will not be taxed by Utah. In addition, the income earned while a resident of Utah is not taxed by the state of which the taxpayer was previously a resident. There are rare exceptions to this general rule and the following examples will help determine if you qualify to take the credit and how to prorate the tax, if needed.

The following examples and explanations have been prepared to assist you in determining if you qualify for the credit for taxes paid to another state. The examples are representative of the most common problems encountered. Consequently, they may not cover your specific situation. If you are still uncertain if you qualify, you may contact a technical research agent at:

(801) 297-7705
1-800-662-4335 extension 7705 if you are outside the Salt Lake area

Example 1 – Part-year resident with no income taxed by both states

Facts

• Rickie moved from Arizona to Utah on August 1 of the tax year.
• Part-year resident of Arizona from January 1 through July 31
• Part-year resident of Utah from August 1 through December 31
• He transferred all of his bank accounts and other financial resources to Utah. So there was no income earned in Arizona after he established his residency in Utah.

Summary of state income taxes

State	Taxable Income	Tax
Arizona	$20,000	$5,000
Utah	$17,000	$1,043
Total Federal Adjusted Gross Income	$37,000

Rickie is not entitled to take a credit for taxes paid to another state. None of Arizona sources of income were earned after Rickie became a resident of Utah. Consequently, none of the Arizona income is included in the Utah sources of income column (column A) of Utah form TC-40C.

Example 2 – Part-year resident with income taxed by both states. Credit calculated using gross AGI method.

Facts

• Anne Smith is single and she moved to California during the tax year. Her part-year residency for each state was:
  • Utah residency from January 1 through May 30
  • California resident from May 31 through December 31
• Anne received some income from Utah investments after she established residency in California.

Summary of state income

• The federal adjusted gross income on Anne's federal income tax return is $42,470.
• Utah's adjusted income is $22,183. This is the income Anne received while she was a Utah resident, plus all income on Utah investments.
• California's adjusted income is $29,174. This includes some Utah investment income received after Anne became a California resident.

Income Summary	Amount
Adjusted gross income taxed in California	$29,174
Adjusted gross income taxed in Utah	$22,183
Sum of adjusted gross income taxed in Utah and California	$51,357
Federal Adjusted Gross Income (FAGI)	$42,470
Double taxed income - Sum of Utah and California adjusted income minus the FAGI	$ 8,887

Summary of state income taxes

Utah: Because Anne is a part-year Utah resident, the Utah tax is calculated in two steps.

1. Utah's taxable income after subtracting Anne's $7,890 itemized deductions and $2,550 personal exemption is $32,030. The Utah tax on all of Anne's income is $2,092.
2. The Utah tax is then prorated on the income earned only in Utah. The Utah income tax ratio is 0.5223 ($22,183 divided by $42,470 = 0.5223). Using this ratio, the amount of tax on Utah income is $1,093 ($2,092 x 0.5223 = $1,093).

California: The tax on the California income is $1,200.

The credit for taxes paid to another state is calculated on Utah form TC-40A, as shown below.

1. Federal adjusted gross income taxed by Utah and California	1	$ 8,887	00
2. Federal adjusted gross income from federal return	2	42,470	00
3. Portion of other state gross income to total income (divide line 1 by line 2 and round to 4 decimal places.				3	0.2093
4. Utah income tax (line 14 on front of return)	4	2,092	00
5. Credit limitation (line 4 times decimal on line 3)	5	438	00
6. Actual income tax paid to California. Part-year residents must prorate the tax paid to other state(s). The credit only applies to the portion of the actual taxes paid on income that was taxed in Utah and the other state(s) shown.	6	366	00
7. Credit for taxes paid to another state (line 5 or line 6, whichever is less). Enter on TC-40S, Part 4, using code 17				7	366	00

Line 1: This is the amount of the income that is taxed by both Utah and California.

Line 5: This is the Utah tax prorated on the double-taxed income.

Line 6: The tax on the California return is $1,200, which must be prorated for the double-taxed income. The amount of income taxed by both California and Utah is $8,887. The calculation for the prorated tax on the $8,887 is:

$8,887 divided by $29,174 = .3046 (California's ratio of income taxed in both states).

Using this ratio the credit is:

$1,200 x .3046 = $366

Line 7: The credit for taxes paid to another state cannot exceed the tax paid to California on the same income. Anne may take a credit of $366 on her Utah return.