Oregon Question

[JohnH]

Taxpayer is a full-year CA resident who commutes to OR. Employer in OR withholds and remits only CA tax, which I understand is proper due to reciprocity agreement.

Due to a one-time payment from a previous CA emplolyer, this year he has CA income of $240K (including the OR income) and OR W-2 income of $160K. OR tax is $12K and CA tax is $16K. (Figures are rounded)

The way I read the instructions, he must calculate the OR withholding credit as being the smaller of:
1) Net OR tax liability ($12K - makes sense)
2) Net CA tax liability ($16K - makes sense)
3) OR tax liability times ratio of CA total income divided by OR income ($18K - makes sense)
4) CA tax liabiltiy times ratio of OR income divided by CA total income ($10.5K - problem)

#3 above would be limited to no more than the net OR tax liability of $12K, so that isn't a problem. However, now we come to #4.

Since #4 above is 66%, it seems that he can only claim $10.5K as a credit against his OR tax liablity, even though he paid CA much more than $10.5K. Does anyone know of an exception or any way around the calculation of the credit? Or have you ever had any success in writing to OR requesting an exception to the general rule when the result is skewed?

Thanks for any suggestions, especially if I'm failing to understand the rules surrounding the calculation of the OR withholding credit.

[JON]

I may be missing something

if there is a reciprocity agreement does that not mean the dollars are all taxed in CA and there is no filing requirements at all in Oregon. I am assuming there is no Oregon withholding or tax so there is no credits on the CA return for taxes paid in other states...

He is only filing in one state CA because of the agreement...?????

[Gary2]

I was surprised by this, too. It appears that CA, OR, and some other states do reverse reciprocity, in which the non-resident state gets to keep the taxes on earnings in that state, but also provides a credit for taxes paid to the resident state. I'm more familiar with the standard reciprocity agreements (PA, NJ, etc.) in which the non-resident state gets nothing, or the non-reciprocity situation (e.g. all of New England), in which the non-resident state gets first dibs, and the credit is claimed on the resident return.

The calculation seems fair, though the taxpayer won't see it that way. The OR credit in this case is the percentage of the CA tax attributable to the OR income. If the taxpayer hadn't received the extra CA income, then the total CA tax would have been much less, and hence the OR credit would still be small. These sorts of credits are annoyingly complicated, because they try to compensate for graduated tax scales that differ between the states.

[OtisMozzetti]

one of those 4 states

...
proper due to reciprocity agreement.
...

Mr. John H. in Charlotte, I would presume that your understanding about reciprocity agreements on employer payroll agreements is a correct understanding, but I do want to comment about the general situation concerning California and Oregon.

My comment arises from the Schedule S, "Other State Tax Credit", on California returns. Oregon is one of the four states (plus Guam) where California does not have any reciprocal agreement. The other state credit is designed to give some relief when income is double-taxed, i.e. taxed by two different states. The unusual states which must be handled differently are Oregon, Arizona, Virginia, and Indiana (plus Guam).

Again, the other state tax credit which I am partially describing is about state income taxes in general, not about reciprocity agreements on employer payroll withholding.

EA in California

[JohnH]

Thanks Otis. I did use the term "reciprocity" incorrectly with respect to the tax return filing. I need to be more careful with these terms, don't I?

I thought there must be some sort of agreement between the two states, because there's a reversal - OR allows the credit on the non-resident return for taxes paid to CA. This means that OR is passing up the tax revenue in favor of CA, even though the income is earned in OR. Generally, it seems to me that it works the other way - the state in which the income is earned collects the taxes and the credit (if any) is claimed on the taxpayer's resident-state return. Odd situation here.

And you are correct that my question is concerned specifically with the credit to be claimed on the OR return. I don't see any way around the issue of the credit being decreased due to the limitations imposed by the second formula (my item #4), and was hoping that perhaps I was missing something or that there might be a way to obtain some sort of relief in this situation.

Now that you've alerted me to CA Schedule S (which I was not aware of) I'll work through it to determine if perhaps there's some relief to be obtained on the CA return, although my intuition tells me this may be problematic because there appears to be a see-saw effect between the two returns using this schedule.

[Gene V]

Calif. Schedule S

John,

Calif. Schedule S comes into play if you where an Oregon full time resident and file Calif. 540NR.
In your example, Schedule S is not use, since your client is full time Calif. Resident.
If you are an Oregon resident, then Oregon tax all worldwide and statewide income, doesn’t matter if you work in another state. I believe California does the same thing.

However, you do get credit from California and Oregon for paying taxes on the same income. The forms to file depend on which state you are a resident.


Gene