How to Claim Michigan’s Credit for Taxes Paid to Another State
Paid income tax to another state or city as a Michigan resident? Understand the process for claiming a credit to offset your Michigan tax liability.
The Michigan credit for taxes paid to another state prevents double taxation. It allows Michigan residents who earn income in another state, and pay income tax there, to receive a credit against their Michigan tax liability. This ensures the same income is not fully taxed by both jurisdictions. The credit applies specifically to income-based taxes.
Determining Eligibility for the Credit
To claim the credit, a taxpayer must be a Michigan resident for all or part of the year. For part-year residents, the credit only applies to income earned and taxed by another state during the period of Michigan residency. The income must be subject to tax in both Michigan and the other jurisdiction, and includes wages, commissions, and income from a business.
The term “another state” includes other U.S. states, the District of Columbia, Canadian provinces, and local governments outside of Michigan that impose an income tax, such as a city. For example, a Michigan resident who works in Toledo, Ohio, and pays Toledo city income tax may be eligible. Property taxes, sales taxes, or other non-income taxes paid to another state are not eligible for this credit.
Michigan has reciprocal agreements with several states:
- Illinois
- Indiana
- Kentucky
- Minnesota
- Ohio
- Wisconsin
A Michigan resident who earns only wages and salaries in one of these states should file an exemption certificate with their out-of-state employer to prevent tax withholding. If taxes are withheld in error by a reciprocal state, the taxpayer must file a nonresident return with that state for a refund. However, business income or other non-wage income taxed by a reciprocal state may still be eligible for the credit.
Required Information and Documentation
Before calculating the credit, you must complete the income tax return for the other state or locality. This nonresident or part-year resident return is the source for the information needed to claim the Michigan credit. From that completed return, you will need two figures: the total income taxed by the other jurisdiction and the amount of income tax you were liable for.
Calculating the Michigan Tax Credit
The calculation ensures the credit does not exceed either the tax paid to the other state or the Michigan tax on the same income. The allowable credit is the lesser of two amounts. The first is the actual income tax liability you paid to the other state on the double-taxed income. You cannot claim a credit for more tax than you paid.
The second amount is the portion of your Michigan income tax attributable to the double-taxed income. To determine this, divide the income subject to tax in both states by your total income subject to Michigan tax. Multiply the resulting percentage by your total Michigan tax liability before credits to find the maximum credit amount Michigan will allow.
For example, a Michigan resident earned $20,000 in a non-reciprocal state and paid $800 in income tax to that state. Their total Michigan taxable income is $100,000 and their Michigan tax is $4,000. First, divide the double-taxed income ($20,000) by the total Michigan income ($100,000), which equals 20%. Next, multiply this percentage by the total Michigan tax ($4,000), which results in $800.
In this case, the tax paid to the other state ($800) and the calculated Michigan tax on that income ($800) are the same, so the credit is $800. If the tax paid to the other state had been $700, the credit would be limited to $700, as it is the lesser amount.
How to Claim the Credit on Your Michigan Return
After calculating the credit, enter the final amount on your Michigan income tax return, the MI-1040. This figure directly reduces your Michigan tax liability, which can lower the amount you owe or increase your refund.
You must attach a complete copy of the income tax return filed with the other state or local government to your Michigan return. If this documentation is not included, the Michigan Department of Treasury may delay processing or deny the credit.
If you file a paper return, physically attach a printed copy of the other state’s return to your MI-1040. For e-filers, your tax software will handle the electronic attachment of the required documents during submission.
Special Considerations for Canadian Provincial Taxes
Michigan residents who pay income tax to a Canadian province must use Michigan Form 777, “Resident Credit for Tax Imposed by a Canadian Province.” The credit is only available for provincial-level income taxes. Taxes paid to the Canadian federal government are not eligible for this state credit but may qualify for the Foreign Tax Credit on your U.S. federal return.
When filing Form 777, you must attach copies of your Canadian Federal Individual Tax Return (Form T-1), your Canadian Statement of Remuneration Paid (Form T-4), and your U.S. federal Foreign Tax Credit form (Form 1116), if applicable. All financial amounts must be converted to U.S. dollars. The Michigan credit cannot exceed the portion of your Canadian provincial tax that was not already used as a credit on your U.S. federal return.