If you’re a full-year Arizona resident who earned income in another state and paid income tax there, the Arizona credit for taxes paid to another state usually lets you offset your Arizona tax so the same dollars aren’t taxed twice. The credit lives in A.R.S. 43-1071 and applies only to net income taxes, not to sales, property, or gross receipts taxes.1Arizona Legislature. Arizona Code 43-1071 – Credit for Income Taxes Paid to Other States; Definitions One important catch: it isn’t available for taxes paid to every state. If the other state already gives Arizona residents a credit for Arizona tax, Arizona blocks its own credit, and that rule trips up a lot of people with California income.
Who Qualifies
Three conditions have to be true at the same time. The income must come from sources within the other state and be taxable there regardless of where you live. The other state must not already offer Arizona residents a credit against its own tax for taxes paid to Arizona. And the income must also be taxable in Arizona.1Arizona Legislature. Arizona Code 43-1071 – Credit for Income Taxes Paid to Other States; Definitions Miss any one of the three and the credit isn’t available.
Only “net income taxes” count. The statute defines these as taxes that allow deductions or exemptions from gross income. Taxes based on gross income, gross receipts, or gross dividends don’t qualify, so if another state taxed you under a gross receipts system, there’s no Arizona credit for that payment.1Arizona Legislature. Arizona Code 43-1071 – Credit for Income Taxes Paid to Other States; Definitions
Part-year residents can also claim the credit. For the part of the year you lived in Arizona, use the resident rules; for the rest of the year, use the nonresident rules. The core requirement is the same either way: the income has to have been taxed by both Arizona and the other state in the same tax year.2Arizona Department of Revenue. Arizona Form 140PY Booklet
Which States Qualify and Which Don’t
Under the 2025 Form 309 instructions, Arizona residents can claim the credit for tax paid on a nonresident return filed in any of these states: Alabama, Arkansas, Colorado, Connecticut, Delaware, the District of Columbia, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Utah, Vermont, West Virginia, and Wisconsin.3Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country
Four states are off the list: California, Indiana, Oregon, and Virginia. These are reverse credit states. They give Arizona residents a credit on the nonresident return filed there for the Arizona tax owed on the same income, so Arizona’s statute blocks a duplicate credit on this side.3Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country States with no income tax, like Texas, Nevada, Florida, Wyoming, and Washington, also don’t qualify because there’s no tax to credit in the first place.
The California situation catches a lot of Arizona residents who commute or earn California-source income. If you work in California and file a California nonresident return, the credit goes on the California return for the Arizona tax you owe, not on the Arizona return. Claiming it in the wrong direction is one of the most common mistakes with this credit.
How the Credit Amount Is Calculated
The credit equals the tax you actually paid to the other state, but it’s capped at the Arizona tax on the same income. The statute writes the cap as a proportion: the credit can’t exceed the share of your Arizona tax liability that the double-taxed income makes up out of your total Arizona taxable income.1Arizona Legislature. Arizona Code 43-1071 – Credit for Income Taxes Paid to Other States; Definitions
Arizona’s individual rate is a flat 2.5%, so the math is usually clean.4Arizona Department of Revenue. Individual Income Tax Highlights Say you earn $120,000 total, with $40,000 from work performed in Colorado. Colorado taxes that $40,000 and you pay $1,800 there. Your Arizona tax on $120,000 is $3,000. The proportional cap is ($40,000 / $120,000) × $3,000 = $1,000. Even though you paid Colorado $1,800, your Arizona credit tops out at $1,000, and you absorb the $800 difference because Colorado’s rate was higher.
When the other state’s rate runs lower than Arizona’s 2.5%, the cap rarely matters. Paid $600 in another state on $40,000 of income, with a proportional Arizona limit of $1,000? Your credit is the full $600.
Dual-Resident Situations
If two states treat you as a resident at the same time, subsection D of A.R.S. 43-1071 gives you a path to a credit even when the standard rules would otherwise disqualify it. The other state has to be taxing you as a resident and not giving you a credit against its own tax for the Arizona tax on that income.1Arizona Legislature. Arizona Code 43-1071 – Credit for Income Taxes Paid to Other States; Definitions Without this provision, someone caught between two states’ residency rules could face full taxation in both with no relief from either.
Credit for Foreign Country Taxes
The credit isn’t limited to U.S. states. A.R.S. 43-1071 also covers net income taxes paid to a foreign country as long as the income is taxable in Arizona, and the same proportional cap applies.1Arizona Legislature. Arizona Code 43-1071 – Credit for Income Taxes Paid to Other States; Definitions Convert the foreign payment to U.S. dollars using the exchange rate in effect on the day you paid the tax. Any foreign tax credit you claim on your federal return is separate; the Arizona credit is calculated using only Arizona figures.
How Income Gets Sourced Across States
Only income “from sources within” the other state qualifies, so sourcing matters. Wages and business income are generally sourced to the state where the work is performed. Work two days a week in New Mexico and three in Arizona, and only the New Mexico portion of your wages counts as New Mexico-source income.
Investment income like dividends, interest, and capital gains is usually taxed by your home state rather than the state where the company is located. An Arizona resident holding stock in a New York company typically owes tax on those dividends only to Arizona, so there’s nothing to credit.
Partnerships and S corporations add a wrinkle. Arizona taxes resident owners on their full distributive share, and when part of that share was earned in another state and taxed there, the resident owner can claim the credit here. But if the entity elected to pay tax at the entity level in the other state, the credit on your individual return can’t exceed what you would have owed had the income been taxed at the individual level instead.5Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country
How to File the Credit
Claim the credit on Arizona Form 309, which handles both the credit amount and the proportional cap. If you earned qualifying income in more than one state or country, complete a separate Form 309 for each.3Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country
You also have to complete Arizona Form 301, Nonrefundable Individual Tax Credits and Recapture, and file it with your return. This credit isn’t exempt from the Form 301 requirement, and skipping it can get the credit denied.6Arizona Department of Revenue. Form 301 Instructions – Nonrefundable Individual Tax Credits and Recapture Both forms attach to your Form 140 (full-year resident), Form 140PY (part-year), or Form 140NR (nonresident).3Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country
If you elected to have your small business income taxed separately under Arizona’s SBI provisions, don’t include that income on the regular Form 309. Use Form 309-SBI with Form 301-SBI and file them with your SBI return.5Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country
Documentation the Department May Ask For
You don’t need to attach proof when you file, but the Arizona Department of Revenue can request it later. Keep the following handy:
- A complete copy of the other state’s tax return, including schedules and worksheets. If the foreign country doesn’t require a return, keep documentation showing the tax imposed and paid.
- Proof of payment, such as a canceled check, electronic payment confirmation, or official receipt.
- Brokerage statements if the income involved investment earnings sourced to another state.
- For foreign taxes, a statement showing the currency conversion rate you used.
These come directly from the Form 309 instructions.7Arizona Department of Revenue. Form 309 Instructions – Credit for Taxes Paid to Another State or Country W-2s showing state withholding can back up your claim, but ADOR specifically asks for the return and proof of payment.
If the Other State Refunds Some of the Tax
If the other state later refunds or credits any of the tax you used to claim the Arizona credit, you have to file an amended Arizona return and recalculate. The statute requires you to notify the department right away.8Arizona Department of Revenue. Arizona Form 309-SBI Instructions – Credit for Taxes Paid to Another State or Country File the amendment on Form 140X with a revised Form 309 showing the lower credit.
This most often comes up when you filed the other state’s return with estimated figures and got an adjustment, or when that state audited and reduced your liability. Keeping the original Arizona credit after a refund on the other side creates a deficiency ADOR can assess, with interest and penalties. If you know an audit or adjustment is pending in the other state, don’t spend any Arizona refund that hinged on the credit until the other state’s numbers are settled.