How can you avoid multi-state double taxation: credits and apportionment?

When you earn income in more than one state — whether because you moved, work remotely, or operate a multi-state business — two or more states can assert the right to tax the same dollars. States use two primary tools to prevent overtaxing the same income: tax credits (often called a credit for taxes paid to another state) and apportionment formulas for business income. This article explains how those tools work, practical steps to protect yourself, real-world examples, and where to look for authoritative guidance.

How tax credits for taxes paid to another state work

  • Resident credit: Most states give residents a credit against their home-state tax for income tax paid to another state on income that is also taxed by the resident state. The credit is typically limited to the amount of tax that the income would have incurred in the resident state.
  • Nonresident sourcing: If you are a nonresident earning income in a state, that state may tax the portion of income sourced to it (wages earned working in the state, rental income from property located there, etc.). You then claim a credit in your state of residence for taxes paid to the nonresident state, subject to state rules.

Example (simple): If you live in State R and pay $1,000 of tax on income earned in State A, and State R’s tax on that same income would be $700, your resident credit typically reduces State R tax by $700 — you won’t get a refund for the extra $300, but you avoid being taxed twice on the same portion of income.

Authoritative sources: state resident credit rules are published by each state revenue department; overview material is available from the Multistate Tax Commission (https://www.mtc.gov) and Tax Foundation summaries (https://taxfoundation.org/state-income-tax-reciprocity/).

How apportionment works for businesses

Businesses (especially corporations and pass-throughs with nexus in multiple states) don’t typically use a simple credit system. Instead, they assign a portion of their business income to each state using an apportionment formula. Typical factors:

  • Sales factor: percentage of sales made to the state
  • Payroll factor: percent of wages paid in the state
  • Property factor: percent of property located in the state

Many states use a single-sales-factor or double-weighted sales factor; others still use a three-factor formula. The chosen formula determines how much of your company’s net income is treated as taxable by each state.

Authoritative resource: Multistate Tax Commission guidance and state department of revenue apportionment instructions explain the specific formula for each state (example: state apportionment guides at state revenue websites).

Common scenarios and how credits or apportionment apply

1) Part‑year residents and movers

2) Remote workers and convenience-of-employer rules

  • Some states (notably New York) apply a “convenience of the employer” rule that taxes telecommuters differently: if you work from home for your convenience while employed by an out-of-state employer, the employer’s state may still tax your wages. Check state-specific rules and our article on remote-worker filing: “Filing State Taxes for Remote Workers: Residency Rules” (https://finhelp.io/glossary/filing-state-taxes-for-remote-workers-residency-rules/).

3) Businesses with physical locations and sales across states

Step-by-step approach to avoid double taxation (practical checklist)

  1. Determine residency status for each year (resident, nonresident, part‑year resident). State definitions vary; use state revenue guidance.
  2. Identify where income is sourced (wages, business profits, rents, retirement income). Source rules differ by income type and state.
  3. File nonresident returns in states that tax the sourced income and file resident or part‑year returns in your home state as required.
  4. Claim resident credits for taxes paid to other states where allowed — calculate the allowable credit carefully (states cap credits differently).
  5. For businesses, calculate apportionment using each state’s required formula (sales, payroll, property) and file accordingly.
  6. Keep contemporaneous records: pay stubs showing work location, contracts, travel logs, sales records, and state tax return copies.

Calculation examples (illustrative)

Individual credit example:

  • You live in State X (tax rate 5%). You earned $80,000; $10,000 was earned working in State Y, where you paid $400 in state tax. State X taxes you on all income but allows a credit limited to the tax that would have been due on the out‑of‑state income. If State X’s tax on that $10,000 is $500, your credit equals $400 (the tax actually paid to State Y), so your State X tax is reduced by $400.

Business apportionment example:

  • A company has $1,000,000 in net income. For State A: sales factor 25%, payroll factor 10%, property factor 15%. If the state uses equal weighting, apportioned share = (25% + 10% + 15%) / 3 = 16.67%. State A can tax $166,700 of the company’s federal taxable income.

Note: Actual filings must follow state forms and rounding rules. Consult the state’s revenue department instructions.

Common pitfalls and how to avoid them

  • Failing to claim an available credit: Many taxpayers overpay because they don’t identify or compute the resident credit correctly.
  • Misallocating income or misapplying apportionment factors: Use state instructions and, for businesses, maintain clear sales/payroll/property tracking by location.
  • Ignoring reciprocity and special rules: Some states have reciprocity agreements or special sourcing rules for pensions, military pay, and unemployment benefits.
  • Overlooking employer withholding: Confirm your employer is withholding to the correct state; withholdings don’t determine ultimate tax liability but affect cash flow and possible penalties.

When to get professional help

In my practice, I see two areas that consistently generate errors: (1) complex apportionment for multi-state businesses and (2) state-specific sourcing rules for remote workers (including convenience-of-employer doctrines). If your situation involves significant income, multiple states, or a NE/NY-like convenience rule, consult a CPA or tax attorney who specializes in state taxation. For disputes, states provide administrative appeals processes — keep careful documentation of taxes paid and location of work.

Resources and authoritative references

Recordkeeping tips

Keep the following for at least three to seven years (state retention rules vary): pay stubs with work location, employer letters about work arrangement, contracts, travel and telework logs, business sales and payroll records, and copies of state returns and credits claimed.

Final takeaway

Avoiding multi-state double taxation is a mix of correct filing, documenting where income is earned, and using the state tools designed to prevent overlap: resident credits and business apportionment. When in doubt, consult a state-tax specialist — state rules and precedents frequently change, and a small documentation gap can lead to an unexpected tax bill.

Professional disclaimer: This article is for educational purposes and does not constitute legal or tax advice. State tax laws change and vary widely; consult a qualified tax professional for guidance tailored to your facts.

(Authority: Multistate Tax Commission, Tax Foundation, and state revenue departments.)