Income Taxed by Two States

You've got that handwaiving term "essentially" in there. The United States government asserts jurisdiction over its citizens regardless of where in the world they live and requires that tax returns be filed annually. Generally, worldwide income is subject to tax.

Tax treaties generally handle the issue of dual taxation NOT by limiting reporting of foreign-sourced income but with tax credits.

You have a variety of states applying their own revenue laws. My state is like the federal government in that world-wide income is disclosed (calclations are based on federal AGI) and credits applied for foreign taxes paid, "foreign" in this sense meaning to other states or foreign countries. We also have additions and subtractions to determine basic income under state revenue law before the tax calculation is made.

There is the further complication of full-year versus part-year residency. In some states, that's apportioned, and the method of apportionment may be different on income versus exemptions and deductions. In other states, there are various methods of pro-rating.

There is yet another complication in which neighboring states have agreed NOT to tax income from a job if the worker isn't resident, but it's still reportable.

This resulted in a bizarre complication I once ran into in which a taxpayer was adversely affected by such an arrangement between two neighoring states: His job was in State A. He was a part-year resident of State B. That meant he had file an income tax return as a part-year resident of State B. You guessed where I'm going with this: He moved, and became a part-year resident of State A. Even though all his income from work was from the one state, he had to report it to State A as a part-year resident of State B, and then report it to State A as a part-year resident of State A.

My state doesn't tax pensions, but other states assert nexus over pensions as deferred income from the state in which it was earned.

You'd need there to be a model state revenue act that every state would adopt to get common income definitions of what's subject to reporting and what's subject to taxation.

I want to add to the above. It is common that one's resident state would give one a tax credit for any non-resident tax paid to another state. In many cases, this is how any double-taxation is mitigated. It's not always so, but often is. On the other hand, if an individual is considered a resident of both states, this "other state tax credit" will not be available to them, as it is normally a credit for any "non-resident" tax paid. And then, there are grey areas. Last year, there were cases discussed where NY taxpayers moved to another state but continued working remotely from their new home (say, in CA) for their NY employers. NY treated their earnings as NY "resident" earnings if they worked from home (as opposed to that company's CA office), and CA treated their earnings as CA resident earnings. No "other state credit" was available to them in this situation. There was lots of discussion of this unfortunate outcome during last tax season.

Maria U. Ku, CPA Oakland, CA

I may have accidentally sent my reply to the individual rather than the group:

See 4 U.S. Code § 114 - Limitation on State income taxation of certain pension income