Question

Mesrop is an Oregon resident. He commutes daily to California for work. His only income was $64,000 in wages from his job in California. When his tax preparer prepared his returns, he estimated he would owe $2,700 tax to California and $2,200 tax to Oregon.

Which of the following statements is correct?
He cannot take a credit on either state return.
He does not need to file a California return because he is an Oregon resident.
He will take a credit on his California nonresident return for the tax he pays to Oregon.
He will take a credit on his Oregon return for the tax he pays to California.

Answer 1

Correct answer: He will take a credit on his Oregon return for the tax he pays to California.

Reason: As an Oregon resident he is taxed by Oregon on his worldwide income but Oregon allows a credit for income taxes paid to another state on the same income (to avoid double taxation). California taxes nonresidents on California-source wages, so he must file a California nonresident return and pay the $2,700. Oregon will allow a credit for that California tax (limited to the Oregon tax attributable to the same income), so his $2,200 Oregon tax would be fully offset by the credit.