When It's Too Good To Be True, It Usually Is Not True! However, There Are Occasional Exceptions To That Rule, So Read On...

We all know the general rule…Your resident state must allow a credit for tax paid to another state on income taxed by both states.  The devil is in the details.  Consider these examples:

• Taxpayer lives in MA (files MA resident return), and works part-time in RI (files RI NR return to report wages from RI employment).  His RI NR tax is $350.  The MA tax on the same income is $325.  He is entitled to a credit on his MA resident return (Schedule Z) in an amount not to exceed the MA tax on that income, so his MA credit for tax paid to another state is $325.
• Taxpayer lives in MA (files MA resident return), and works part-time in VT (files VT NR return to report wages from VT employment).  His VT NR tax is $300.  The MA tax on the same income is $325.  He is entitled to a full credit of $300 on his MA resident return (Schedule Z).
• Taxpayer lives in MA (files MA resident return).  He works part-time in both RI and VT, and files NR returns in both states to report wages from these employments.  His RI NR tax is $350; his VT NR tax is $300.  His MA tax on the combined out-of-state earnings is $650 ($325 + $325).  Using the methodology in a. and b. (above), his combined credit will be $625 ($325 + $300).  However, MA allows an “aggregate computation” when more than one out-of-state tax assessment is involved.  Under this methodology, the combined out-of-state tax is $650 ($350 + $300).  This is compared with the combined MA tax of $650 ($325 + $325) and the taxpayer is allowed a credit of $650, which is $25 more than the result from computing a. and b. separately.  For authority, see MA Directive 93-2 (3/9/1993).

Your editor is indebted to NATP chapter members Mark Goldberg and Charlie Markham, who called this to your editor’s attention.  When Charlie had an example c. situation, he was filing an otherwise simple prior-year return using the MA DOR web site.  It allowed an aggregate calculation.  Thinking that this looked strange, he ran the same return through ProSeries and was allowed only the a. and b. state by state method, which resulted in a lesser credit.  Your editor processed this fact pattern through Drake and found that it will allow either a state by state or an aggregate calculation---your choice.  Your editor also processed this through ATX, with the same result---it will do it correctly if you tell it to!

The comparable RI rule for credit calculation is state by state only.  There is no provision  under RI law for an aggregate calculation.  See Reg. PIT 98-12 (1/1/1998).