Relief from Double Taxation: The Treatment of Foreign Tax Paid for Individuals at the State Level

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Double taxation occurs when there is an overlap of fiscal sovereignty or powers at the domestic or international level. A common example is the imposition of an income tax at both the federal and state level. This particular instance of double taxation of the same income is mitigated by the availability of an itemized deduction on the federal tax return (Form 1040; Schedule A) for state and local income taxes paid.

Another example of double taxation is when the same items of income for the same taxable person for the same taxable period are taxed by two countries--typically the taxpayer's country of residence and the country in which the income is sourced (i.e., "earned"). Bilateral tax treaties often provide solutions to the problem of international double taxation. However, when no treaty provision is applicable, U.S. taxpayers can still gain some relief from double taxation at the federal level by using some combination of the deduction available under IRC Section 164(a)(3), the IRC Section 911 foreign earned income exemption (up to $80,000 for years after 2001), and/or the foreign tax credit (FTC; IRC Sections 901 and 906).

Double taxation exists at the state level as well. Frequently, a taxpayer will be subject to tax on certain items of income in both his/her state of residence as well as in the state in which the income was earned. As is the case on the federal level, bilateral treaties often provide the necessary relief. For example, under a reciprocal agreement between Pennsylvania and New Jersey, a Pennsylvania resident employed in New Jersey will not be …