[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.6362-4]

[Page 320-322]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
               Seizure of Property for Collection of Taxes
 
Sec. 301.6362-4  Rules for adjustments relating to qualified resident 
taxes.

    (a) Net State income tax deduction. For purposes of section 6362 
(b)(1)(B) and (c)(3)(B), and Sec. Sec. 301.6362-2 and 301.6362-3, the 
``net State income tax deduction''

[[Page 321]]

shall be the excess (if any) of (1) the amount deducted from income 
under section 164(a)(3) as taxes paid to a State or to a political 
subdivision thereof, over (2) the amounts included in income as 
recoveries of prior income taxes which were paid to a State or to a 
political subdivision thereof and which had been deducted under section 
164(a)(3).
    (b) Net tax-exempt income. For purposes of section 6362 (b)(1)(C) 
and (c)(3)(A) and Sec. Sec. 301.6362-2 and 301.6362-3, the ``net tax-
exempt income'' shall be the excess (if any) of:
    (1) The sum of (i) the interest on obligations described in section 
103 (a)(1) other than obligations of the State imposing the tax and the 
political subdivisions thereof, and (ii) the interest on obligations 
described in such section of such State and the political subdivisions 
thereof which under the law of the State is subject to the tax; over
    (2) The sum of (i) the amount of deductions allocable to the 
interest described in subparagraph (1) (i) or (ii) of this paragraph 
(b), which is disallowed pursuant to section 265 and the regulations 
thereunder, and (ii) the amount of the adjustment to basis allocable to 
such obligations which is required to be made for the taxable year under 
section 1016(a) (5) or (6).

For purposes of subparagraph (1)(ii) of this paragraph (b), a State may, 
at its option, subject to the tax the interest from all, none, or some 
of its section 103(a)(1) obligations and those of its political 
subdivisions. For example, a State may subject to tax all of such 
obligations other than those which it or its political subdivisions 
issued prior to a specified date, which may be the date that subchapter 
E became applicable to the State.
    (c) Credits for taxes of other jurisdictions--(1) In general. A 
State tax law that provides for a credit, pursuant to section 6362(b)(2) 
(B) or (C) or section 6362(c)(4), and paragraph (b)(1) of Sec. 
301.6362-2 or paragraph (b)(2) of Sec. 301.6362-3, for income tax of 
another State or a political subdivision thereof shall provide that, in 
the case of each taxpayer, the amount of the credit shall equal the 
amount of his liability with respect to such other jurisdiction's tax 
for the taxable year which runs concurrently with, or which ends in, the 
taxable year used by the taxpayer for purposes of the State tax which 
provides for the credit. Such a credit may be allowed with respect to 
every income tax (whether or not qualified) imposed on the taxpayer by 
another State or a political subdivision thereof, or only with respect 
to certain of such taxes. However, for purposes of this paragraph, the 
amount which is treated as being the amount of the taxpayer's liability 
with respect to any such tax imposed by another jurisdiction shall not 
exceed the amount of liability for such tax which is both--
    (A) Reported to the taxing authorities responsible for collecting 
such other jurisdiction's tax, and
    (B) Substantiated pursuant to the requirements of paragraph 
(c)(1)(ii) of Sec. 301.6361-1.
    (2) Limitation. The amount of any credit allowed for the taxable 
year pursuant to this paragraph shall not exceed the product of the 
amount of the resident tax against which the credit is allowed, as 
computed without subtracting any such credit, multiplied by a fraction 
the numerator of which is the amount of income subject to tax by both 
the State imposing the resident tax against which the credit is allowed 
and the other jurisdiction whose tax is being credited, and the 
denominator of which is the amount of income subject to tax by the State 
imposing the resident tax against which the credit is allowed. For 
purposes of the preceding sentence, ``income subject to tax'' means the 
amount of the taxpayer's adjusted gross income which is taken into 
account for purposes of computing tax liability; in the case of a 
qualified resident tax, an appropriate modification shall be made to 
take into account any adjustments which are made pursuant to paragraph 
(a)(1) and (3) of Sec. 301.6362-2, or pursuant to paragraph (a)(2) or 
(b)(1)(ii) of Sec. 301.6362-3.
    (3) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example 1. (i) A, a calendar-year, cash-basis taxpayer, is a 
resident of State X throughout the taxable year. For such year, his 
adjusted gross income for Federal income tax purposes consists of 
$24,000, consisting of $3,000

[[Page 322]]

derived from employment in State X, $5,000 derived from employment in 
State Y. $15,000 derived from employment in State Z, and $1,000 in 
interest income from United States savings bonds. In addition, he 
received net tax-exempt income in the amount of $2,000. For the taxable 
year, he incurs liabilities of $200 for the State Y nonresident income 
tax, and $1,400 for the State Z nonresident income tax. State X, which 
has in effect a State agreement for the taxable year, imposes a resident 
tax against which credits are allowed for the nonresident taxes imposed 
by States Y and Z. Without taking any such credits into account, 
however, the amount of A's liability for such resident tax would be 
$1,500. A properly reports his nonresident income tax liabilities to 
States Y and Z at the same time that he files his return with respect to 
the State X tax, and he substantiates on such return his liabilities to 
States Y and Z.
    (ii) The amount of A's income subject to tax in State X is $25,000 
(his adjusted gross income of $24,000, minus the United States savings 
bond income of $1,000, plus the net tax-exempt income of $2,000). The 
amount of the credit allowable against the State X resident tax for the 
amount of A's liability with respect to the State Y nonresident tax is 
calculated as follows: The maximum amount of credit is the actual amount 
of his liability to Y, or $200. Under subparagraph (2) of this 
paragraph, the amount of the credit is limited to $300 ($1,500 x $5,000/
$25,000). Thus, such limit has no effect, and the full $200 is allowable 
as a credit against A's liability for the resident tax of State X. The 
amount of the credit allowable against the State X resident tax for the 
amount of A's liability with respect to the State Z nonresident tax is 
calculated as follows: The maximum amount of the credit is the actual 
amount of his liability to Z, or $1,400. Under subparagraph (2) of this 
paragraph, the amount of the credit is limited to $900 (1,500 x $15,000/
$25,000). Thus, such limit has the effect of reducing to $900 the amount 
of the credit allowable for tax of State Z against A's liability for the 
resident tax of State X.
    Example 2. (i) B, a calendar-year, cash-basis taxpayer, is a 
resident of State X employed in State Y through March 14, 1977. On March 
15, 1977, B becomes a resident of State Z and remains a resident of such 
State through the remainder of 1977. For 1977, the amount of B's 
adjusted gross income for Federal income tax purposes is $20,000, 
consisting of $6,000 derived from employment in State Y which B held 
during the period of his residence in State X, $12,000 derived from 
employment in State Z which B held during the period of his residence in 
State Z, and $2,000 in interest income from various bank accounts. 
During 1977, B has no interest income from United States obligations, 
and no tax-exempt income. For 1977, B incurs a liability of $200 to 
State Y on account of its nonresident income tax imposed with respect to 
his $6,000 of income derived from sources within that State. State Z, 
which has in effect a State agreement for 1977, imposes a resident 
income tax on B which, if B had been a resident of State Z for all 1977, 
would amount to $1,200 prior to the allowance of any credits under this 
paragraph. However, by reason of paragraph (e)(1) of Sec. 301.6362-6, 
B's liability for the resident tax of State Z, before taking into 
account credits allowed under this paragraph, is reduced to $960 ($1,200 
x \292/365\, or \4/5\). Furthermore, State Z allows a credit for the 
nonresident tax imposed by State Y.
    (ii) The amount of the credit allowable against the State Z resident 
tax for the amount of B's liability with respect to the State Y 
nonresident tax is calculated as follows: The maximum amount of the 
credit is the amount of his actual liability to State Y, or $200. Under 
subparagraph (2) of this paragraph, the amount of the credit is limited 
to $288 ($960 x $6,000/$20,000). Thus, such limit has no effect, and the 
full $200 is allowable as a credit for tax of State Y against B's 
liability for the resident tax of State Z.

[T.D. 7577, 43 FR 59367, Dec. 20, 1978]