OAR 150-316-0084: Credit for Income Taxes Paid to Another State — Computation

(1) General: This rule explains the computation of the credit for taxes paid to another state on mutually taxed income. (a) Residents: An Oregon resident is allowed a credit for taxes paid to another state on mutually taxed income if the other state does not allow the credit. See section (3) of this rule for information on calculating the credit for an Oregon resident. Example 1: Bob, an Oregon resident, receives partnership income derived from Virginia sources and joins in a multiple nonresident filing with that state. If Virginia does not allow a credit for taxes paid to Oregon on the multiple nonresident tax return, then Bob may claim a credit on the Oregon resident return. Example 2: Elizabeth, an Oregon resident, receives income from California property. Because California allows Oregon residents to claim a credit for mutually taxed income on the California nonresident return, Elizabeth is not allowed to claim the credit on the Oregon resident return. (b) Nonresidents: Under ORS 316.131, an Oregon nonresident is allowed the credit if the state of residence allows Oregon residents to claim a credit for mutually taxed income on the nonresident return filed with that state. See section (4) of this rule for information on calculating the credit for an Oregon nonresident. (c) Part-year residents: A person who is a resident for a part of the taxable year and a nonresident for the rest of the year figures the credit under section (3) of this rule for the portion of the year the individual was a resident and under section (4) of this rule for the nonresident portion of the year. (2) Definitions. For purposes of this rule, the following definitions apply: (a) “Adjusted gross income” means federal adjusted gross income as defined in the Internal Revenue Code section 62 and the corresponding regulations. (b) “Modified adjusted gross income” means adjusted gross income as modified under ORS Chapter 316, but only as to items related to federal adjusted gross income. (c) “Items related to federal adjusted gross income” means items of income, gain, loss, exclusion or deduction that are used to arrive at federal adjusted gross income. It does not include items that are unrelated to determining federal adjusted gross income, such as the federal income tax subtraction under ORS 316.695 or the additional medical expense deduction provided by ORS 316.695(1)(d)(B). Example 3: Jon, an Oregon resident, has $40,000 of adjusted gross income, including $10,000 of rental income taxed both by Oregon and another state. Jon also receives a lump-sum distribution of $8,000 from a private pension plan. Because Jon chooses to use the 5-year averaging method to compute federal tax on the distribution, the $8,000 is not included in his adjusted gross income of $40,000. Jon computes modified adjusted gross income as follows: $40,000 — Adjusted Gross Income (5,000) — Less - U.S. Bond Interest (2,000) — Less - Civil Service Retirement (pre 10/1/1991 service) 17,000 — Add - California Municipal Bond Interest 8,000 — Add - Pension distribution $58,000 — Modified Adjusted Gross Income (d) “Mutually taxed income” means that portion of modified adjusted gross income that is both reported to and taxed by Oregon and another state. Example 4: Matt, an Oregon resident, reports adjusted gross income of $21,000, including gain on the sale of Hawaii property of $5,000. For Hawaii tax purposes, the $5,000 gain is increased by a basis adjustment of $250. For Oregon tax purposes, the gain is reduced by a basis adjustment of $1,000. Matt’s modified adjusted gross income is $20,000, ($21,000 of adjusted gross income less the $1,000 Oregon basis adjustment.) The mutually taxed income is $4,000 ($5,000 gain on sale of Hawaii property less the $1,000 Oregon basis adjustment), which is the amount of modified adjusted gross income that is taxed by both Hawaii and Oregon. Example 5: Assume the same facts as Example 4, except that both Hawaii and Oregon require a basis adjustment that increases the gain by $1,000. In this case, the mutually taxed income is $6,000 ($5,000 gain on sale of Hawaii property plus the $1,000 basis adjustment for both Oregon and Hawaii.) Example 6: Verne, an Oregon resident, sold property that he owned in Colorado for a gain of $128,000. On Verne’s Oregon resident return, Oregon allowed $100,000 of losses against the $128,000 of income. Colorado did not allow the losses to be offset or deducted because the losses were not Colorado-sourced losses. Thus, Colorado taxed the entire $128,000 gain. The amount of mutually taxed income is $28,000 because that is the amount of gain upon which tax is actually calculated by both states. (e) “Total income on the return of the other state” means the other state’s taxable income plus any amounts subtracted for itemized deductions, a standard deduction, or exemptions. (f) “Net tax” means state income tax liability (whether Oregon or the other state) after all credits except the credit for taxes paid to another state, the surplus refund under ORS 291.349, the claim of right income repayment credit, the credit for taxes imposed by another jurisdiction on gain from the sale of a personal residence, and the pass-through entity elective tax credit. (g) “Oregon tax based on mutually taxed income” means that portion of Oregon net tax that is attributable to mutually taxed income. It is figured using this formula: (A ÷ B) x C = D, where A = mutually taxed income B = modified adjusted gross income C = Oregon net tax D = Oregon tax based on mutually taxed income. (h) “Other state’s tax based on mutually taxed income” means that portion of net tax of the other state that is attributable to mutually taxed income. It is figured using this formula: (A ÷ E) x F = G, where A = mutually taxed income E = total income on the return of the other state F = other state’s net tax G = other state’s tax based on mutually taxed income. (3) Computing the credit for an Oregon resident. An Oregon resident figures the credit as the lesser of: (a) The Oregon tax based on mutually taxed income; or (b) The tax actually paid to the other state. Example 7: Jim’s modified adjusted gross income of $40,000 includes rental income taxed to Idaho and Oregon of $4,000. His Oregon net tax is $2,000 and his Idaho net tax (not including the Idaho Building Fund tax) is $100. Jim figures his allowable credit as follows: (Mutually taxed income ÷ modified adjusted gross income) x net Oregon tax = Oregon tax based on mutually taxed income. ($4,000 ÷ 40,000) x $2,000 = $200 Jim’s allowable credit is $100, which is the lesser of the Oregon tax based on mutually taxed income or the income tax actually paid to Idaho of $100. (4) Computing the credit for a nonresident. The credit allowed to a nonresident is the lesser of the following amounts: (a) Oregon tax based on mutually taxed income (as defined under (2)(g)); (b) The other state’s tax based on mutually taxed income (as defined under (2)(h)); (c) The tax actually paid to the other state; or (d) Oregon net tax. Example 8: Dieter is a California resident with total income of $50,000 sourced to Oregon and Idaho. He files an Oregon nonresident return reporting $20,000 of income and $1,800 of tax; an Idaho nonresident return reporting $30,000 of income and $2,700 of tax; and a California resident return reporting $50,000 of income and $4,000 of tax. Dieter figures his allowable credit as follows: (a) Oregon tax based on mutually taxed income equals $1,800 [($20,000 ÷ 20,000) x 1,800 = $1,800]. (b) California tax based on mutually taxed income equals $1,600 [($20,000 ÷ 50,000) x 4,000 = $1,600]. (c) Tax actually paid to California equals $4,000. (d) Oregon net tax equals $1,800. Dieter’s credit on the Oregon nonresident return is $1,600, which is the lesser of these amounts. (5) Special Filing Status. Filing status may affect the computation of the credit allowed by ORS 316.082. If a husband and wife file separate returns for Oregon and also file separate returns for another state, the credit is limited. Each spouse may claim only his or her portion of the actual taxes he or she paid to the other state (subject to all other limitations provided under this rule) in computing the allowable credit. (6) If one spouse is a resident of Oregon and the other is a resident of a community property state and files a separate return in that state, the Oregon resident may be entitled to a credit for taxes paid to the other state on mutually taxed income. For purposes of this rule, the mutually taxed income is that which is earned and reported to the other state by the nonresident but included in the income of the Oregon resident by virtue of the laws of the community property state. The amount of the other state’s tax paid on mutually taxed income is determined using the following ratio: (Separate spouse’s mutually taxed income ÷ total income on other state’s return) x other state’s net tax. Example 9: Bruce is an Oregon resident; his wife, Sue, is an Idaho resident. Each files a separate state tax return for Oregon. If Idaho, as a community property state, finds that each spouse has a one-half interest in the earnings of the other spouse, then Bruce is considered to have earned one-half of Sue’s earnings. Under Oregon law, Bruce is taxable by Oregon on all of his individual earnings, plus his one-half interest in Sue’s earnings. Because Bruce is being taxed by Idaho and Oregon on the same item of income, he is entitled to claim a credit on the Oregon tax return based on the mutually taxed income. (7) If a husband and wife file a joint return for Oregon, the entire amount of taxes either or both spouse paid to the other state (subject to all other limitations provided under this rule) may be claimed for purposes of computing the credit allowed under this statute. It does not matter which filing status the taxpayers use for the other state. (8) If a husband and wife file separate returns for Oregon but file a joint return for another state, the allowable credit is limited as follows. Each spouse may claim a credit for taxes paid to another state (subject to all other limitations provided under this rule) based on the following ratio: (Separate spouse’s mutually taxed income ÷ total income on other state’s return) x other state’s net tax. Example 10: Mark and Beth are part-year residents who elect to file separate Oregon returns and a joint Idaho return. Mark has $2,000 income taxed by both Oregon and Idaho and Beth has $8,000 income taxed by both Oregon and Idaho. The total income taxed by Idaho is $40,000 and the total Idaho income tax liability is $2,400. The amount of Idaho taxes Mark may use in computing his credit is $120 ($2,000 ÷ $40,000 x $2,400). The amount of Idaho taxes Beth may use in computing her credit is $480 ($8,000 ÷ $40,000 x $2,400).