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Common questions about the Other State Tax Credit in ProConnect Tax

by ProConnect Tax Online Updated 7 months ago

Below, you'll find answers to frequently asked questions on entering the Other State Tax Credit (OSTC) in ProConnect Tax.

When generating an Other State Tax Credit (OSTC) for a part-year resident return in ProConnect Tax, keep in mind:

  • The program doesn't automatically calculate the OSTC when a taxpayer was a part-year resident of two states and needs to claim the OSTC for one of the states.
  • The program won't calculate the OSTC when the other state isn't included in the client file. 

How to generate the OSTC for a part-year resident:

  1. Go to the Input Return tab.
  2. From the left of the screen, select State & Local and choose Other State Tax Credit.
  3. Select the applicable state from the dropdown list on the left of the screen.
    • This should be the state that's claiming the credit. Generally, the resident state at the time the income was earned.
  4. Select the State abbreviation from the dropdown menu.
  5. Enter the applicable information required for the state. For example, the adjusted gross income (AGI) or taxable income, or income tax paid.
    • Input will vary by states.

Once you've entered all the information, go to the state form and make sure that the program is calculating the OSTC properly.

If the credit is incorrect, check diagnostics to see if the state requires other information. Some forms may be suppressed when using overrides.

The program automatically calculates the credit for taxes paid to other states only when you select the Full Year Resident? checkbox in on the Client Information screen. Generally, the resident state grants a credit for taxes paid to the nonresident state(s). In situations where returns are being prepared for states with a reverse credit agreement (CA, AZ, OR, IN, VA), the credit is granted by the nonresident state(s). The program handles both of these situations. 

Overrides are available on the Other State Tax Credit for each state.

The program doesn't automatically calculate the credit for taxes paid to other states when you leave the Full Year Resident? checkbox blank. The program generates a combination of part-year or nonresident returns. For these returns, you must enter additional information in the Other State Tax Credit screen to generate the credit. For instructions on how to enter this in the program, refer to the "How do I generate the Other State Tax Credit on part-year resident returns?" instructions above.

Some states have reciprocal agreements, reverse reciprocal agreements or agreements between states that allow taxpayers to earn income in a nonresident state without paying taxes on that income to the nonresident state. If you have a state with a reciprocal agreement in your multi-state return, the program calculates the correct credit or the excludable income under the agreements (see individual state instructions for details).

In most states, income earned in one state by a resident in another state is taxed by both states. Generally, the state of residence offers a credit for some part of the tax paid to the other state.

A reciprocal agreement, or reciprocity, is an agreement between two states that allows residents of one state to request exemption from tax withholding in the reciprocal state.

There are generally two ways reciprocal agreements work:

  1. Income not taxed at source: both states tax the income, but the state of residence offers the credit.
  2. Reverse credit states: both states tax the income, but the nonresident state offers the credit.

ProConnect Tax calculates most entries for the Other State Tax Credit screen, including the effects of most reciprocal agreements, automatically when the taxpayer is a full-year resident.

For complex full-year resident returns and part-year resident returns, you must manually fill out the Other State Tax Credit screen for the state that offers the credit. Refer to "How do I generate the Other State Tax Credit on part-year resident returns?" above for instructions on manually entering this information.

The following critical diagnostic generating in the Individual module of ProConnect Tax:

Due to a reciprocal agreement with (State #1), the (State #2) return is not required to report any income. The return is being filed solely for the purpose of claiming a refund of state taxes withheld from (State #2). (reference #949)

Why is this diagnostic generating?

This diagnostic is an informational diagnostic made critical to inform you of why the state return is generating. Typically, states that have a reciprocal agreement aren't required to file the other state return, unless a refund is being claimed. This diagnostic won't prevent the returns from being e-filed.

Refer to the form instructions for the applicable state for more information on the state's reciprocal agreement.

StateForm / Schedule
AlabamaSchedule CR
ArizonaForm 307
CaliforniaSchedule S
ColoradoForm DR 0104CR
ConnecticutSchedule 2
District of ColumbiaSchedule U
DelawareDE Schedule I
GeorgiaForm 500 Line 18
IdahoForm 39R
IllinoisSchedule CR
IndianaSchedule 6
IowaForm IA-130
KansasForm K-40 Line 13
KentuckySchedule ITC
LouisianaForm IT-540 Schedule C
MassachusettsMA Worksheet or Schedule F
MaineSchedule A
MichiganMI-1040 Line 18
MinnesotaSchedule M1C
MississippiForm 80-160
MissouriForm MO-CR
MontanaForm 2 Page 9
North CarolinaForm D-400TC
NebraskaForm 1040N Schedule II
New JerseySchedule NJ-COJ
New MexicoPIT-1 line 20
New YorkIT-112R/IT-112C
North DakotaSchedule 4/ND-1 CR
OhioSchedule C
OklahomaForm 511TX
PennsylvaniaSchedule G
Rhode IslandSchedule III
South CarolinaSC1040TC
VermontSchedule IN-117
VirginiaSchedule OSC/CG
West VirginiaSchedule E
WisconsinSchedule OS
ProConnect Tax

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