Maximizing the Other State Income Tax Credit: Defining Net Income Tax, Qualifying Local Taxes, Recent Legislation

The other state credit is a tax credit, as opposed to a deduction. Although this is a frequently taken credit, it is often not given due consideration. States offer the credit to eliminate double taxation of residents whose income is taxed in other states. Key to determining the credit is the definition of a net income tax. Most states specifically identify which taxes qualify and which do not. California, for example, states that the Texas franchise tax is not a net income tax because it taxes gross, as opposed to net, income.

Certain jurisdictional taxes can qualify as a net income tax and should not be overlooked. Whether or not jurisdictional taxes qualify must be considered on a state-by-state basis. New York City's Unincorporated Business Tax (UBT) can qualify as a net income tax. An appeal in the Mather case is currently under consideration in California. Mather was denied refund credits for other state taxes, including New York City's UBT and the metropolitan commuter transportation mobility tax. Mather argues that the taxes paid are indeed net income taxes and credit worthy. SALT practitioners must be aware of the latest developments affecting the other state credit and understand how to maximize this credit for individual income taxpayers.

Listen as our panel of state and local tax experts examines other state credit eligibility requirements for multi-jurisdictional in various states.