Can a Utah resident get credit on their Utah income tax return for income tax they also paid to another state on the same income?

Plain-English summary

This 1996 letter is actually two letters stitched together. The first is a request from another state's tax commissioner (identified in the file only by title, "Commissioner," with the name redacted) to Utah's then-Commissioner Roger O. Tew, asking how Utah's credit worked so that state could confirm its own reciprocity rules under Section 58.1-332, Code of Virginia -- a Virginia statute allowing a credit on Virginia nonresident returns for income tax paid to another state on wages and on certain home-sale gains. That first letter explains Virginia's own reciprocity mechanics and asks Utah to answer some enclosed questions about Utah's credit; it is background, not a statement of Utah law.

The substantive Utah ruling is the second letter, the Commission's response. It explains how Utah's own credit for taxes paid to another state works. A Utah resident who anticipates claiming the credit files form TC-40. Income is reportable to Utah -- and therefore potentially subject to another state's income tax too -- when it was earned for services performed in that other state, or when it is business income or gain on the sale of a personal residence that is included in the taxpayer's federal adjusted gross income (FAGI).

The Commission drew two important lines. First, only income that is actually included in the taxpayer's FAGI is relevant to the credit; income excluded from FAGI has no bearing on it. Second, only another state's income tax qualifies for the credit -- other taxes, fees, levies, or assessments imposed by another state don't count, even if related to the same income.

For part-year residents and nonresidents, the mechanics differ: they use form TC-40NR, which allocates income between Utah and non-Utah sources. Because that allocation already keeps non-Utah income out of the Utah tax base, it "largely eliminates the necessity of computing a credit for tax paid to another state," and no separate schedule is provided for it on that form. Even so, the Commission noted the credit can still be added if the taxpayer provides the required documentation. The ruling points to Utah Admin. Code R865-9I-3 as the governing administrative rule.

What this means for you

Utah residents who also earn income in another state

If you live in Utah but earned wages for work performed in another state, or you have business income or a taxable home-sale gain reportable on your federal return, you may owe income tax to both states on the same dollars. Utah's credit is meant to prevent double taxation of that income -- claim it on form TC-40, and keep records showing the income was included in your FAGI and that what you paid the other state was actually an income tax (not some other kind of charge).

Multi-state workers, part-year residents, and nonresidents

If you moved into or out of Utah during the year, or you're a nonresident with only some Utah-source income, you'll generally file form TC-40NR instead. That form allocates your income between Utah and non-Utah sources, so in most cases you won't need to separately calculate a credit for tax paid to another state -- the allocation already keeps non-Utah income out of your Utah taxable base. If your situation still calls for an added credit, be ready to submit the documentation the Commission requires.

Accountants and tax professionals

Two eligibility limits are worth flagging for clients: (1) the credit only applies to income actually included in FAGI -- income excluded from FAGI is simply irrelevant to the computation, and (2) the credit is available only for another state's income tax, not for other state-level taxes, fees, levies, or assessments the client may have paid. Also note this ruling is nearly 30 years old; verify current statute and rule numbers (Utah's tax code and administrative rules have been renumbered repeatedly since 1996) before citing it to a client or in a filing position.

Common questions

Q: I'm a Utah resident and I paid income tax to another state on wages I earned there. Can I avoid being taxed twice?
A: Yes. Report the income to Utah as usual, then claim a credit for the income tax you paid to the other state on form TC-40, provided that income is included in your federal adjusted gross income.

Q: Does the credit cover things like another state's franchise tax or a local occupation fee?
A: No. Per this ruling, only another state's income tax qualifies for the credit. Other taxes, fees, levies, or assessments are not allowed as a credit, even if tied to the same income.

Q: I moved to Utah partway through the year. Do I need to calculate this credit myself?
A: Probably not separately. Part-year residents and nonresidents file form TC-40NR, which allocates income between Utah and non-Utah sources and generally removes the need to compute a separate credit. If you believe you still qualify for an added credit, you'll need to provide supporting documentation.

Q: What if the income taxed by the other state isn't included in my federal adjusted gross income?
A: Then it isn't relevant to this credit. The ruling states that business and other income not included in FAGI has no bearing on the credit for taxes paid to another state.

Q: Can I rely on this 1996 ruling today?
A: Not directly, and only as a general guide. A private letter ruling binds the Utah State Tax Commission only for the taxpayer and facts it was issued to, and this one is nearly 30 years old -- Utah's statutes and administrative rules have been renumbered and amended many times since. Confirm the current rule (successor to R865-9I-3) and consult a Utah tax professional for your situation.

Citations and references

Utah authority:

• Utah Admin. Code R865-9I-3 -- the administrative rule governing the credit for taxes paid to another state, cited as the operative Utah authority (rule numbering as of 1996; verify current citation)

Cited for background only (not Utah law):

• Section 58.1-332, Code of Virginia -- Virginia's own reciprocal credit for income tax paid to another state, referenced by the requesting state's commissioner
• Section 1034, Internal Revenue Code -- former federal provision on gain from sale of a principal residence, referenced in describing what income counts toward Virginia's credit

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/96-074.htm

Original ruling text

96-74

Response
May 3, 1996

Request

Roger
O. Tew, Commissioner

Utah
State Tax Commission

Heber
M. Wells Office Bldg., 160 E. 300 South

Salt
Lake City, UT 84134

Dear
Mr. Tew:

The
purpose of this letter is to request information necessary for the application
of Section 58.1-332, Code of Virginia, relating to credit for individual income
tax paid to another state or to the District of Columbia. A copy of the
applicable Virginia Code section and the 1995 income tax instructions booklets
for residents and nonresidents are enclosed for your examination.

Section
58.1-332 of the Code of Virginia is reciprocal legislation, which relates to
allowance of an individual income tax credit on the Virginia nonresident
individual income tax return for net individual income taxes paid to another
state or the District of Columbia on:

• earned or business income; and

• any gain on the sale of a principal residence (within the meaning
  of Section 1034 of the Internal Revenue Code) to the extent that such gain is
  included in federal adjusted gross income,

For
example, if a state practices reciprocity with Virginia, it will allow an
out-of-state tax credit to Virginia residents who file with that state on wages
(earned income) from sources within that state. Virginia, in turn, will allow a
similar credit to the other state's residents who file a Virginia nonresident
income tax return to report wages from Virginia sources. If a state does not
practice reciprocity with Virginia, the Virginia resident will be allowed a
credit on the Virginia return for income taxes paid by a Virginia resident to
the non-reciprocity state.

Prior
to taxable year 1994, if another state granted a credit which was limited to
certain types of income, e.g., only earned income, the nonresident credit was
generally not allowed. Beginning with taxable year 1994, the other state must
also allow a credit for the gain on the sale of a principal residence (within the
meaning of Section 1034 of the Internal Revenue Code) to the extent that such
gain is included in federal adjusted gross income.

Please
answer the questions on the attached page and return it to me by May 17, 1996,
so that we may determine if there have been any changes which would affect the
application of this credit in your state for the taxable year 1996. My fax
number is provided for your convenience should you prefer to fax your response.

Any
printed material or rules or regulations that you may have on the subject of
tax credits allowed residents and nonresidents will be most helpful to us.

Sincerely,

XXXXX

RE:
Credit for Taxes Paid to Another State

Dear
Sir:

We are responding to your letter
dated April 6, 1996.

A Utah resident anticipating a
credit for taxes paid to another state should file form TC- 40. Income reportable to Utah may be subject to
another state's income tax when the income was earned for services performed in
another state. Also, business income
and the gain on sale of personal residence, when included in the individual's
federal adjusted gross income (FAGI), is reportable to Utah and may be subject
to another state's tax as well.

Business and other income not
included in the individual's FAGI has no relevance to the credit for taxes paid
to another state. Only another state's income
tax is allowed as a credit. Other
taxes, fees, levies or assessments are not allowed.

A part-year resident or non-resident
completes form TC-40NR. On this form,
income is allocated between Utah and non-Utah sources. This allocation largely eliminates the
necessity of computing a credit for tax paid to another state - no schedule is
provided to take the credit. However,
the credit can be added when the taxpayer includes the required
documentation. Please refer to
administrative rule R865-9I-3 enclosed.

Sincerely,

XXXXX