California Other State Tax Credit: Schedule S Filing and Limits

If you live in California and paid income tax to another state on the same income California is taxing, the California Other State Tax Credit lets you offset the double tax by filing Schedule S with your Form 540. The credit is capped, it only covers true net income taxes, and it depends on whether the income is actually sourced outside California under California’s own rules.

Who Qualifies

Revenue and Taxation Code Section 18001 sets the ground rules. You qualify if you were a California resident during the tax year and paid income tax to another state on income that California also taxed.¹ Part-year residents follow the resident rules for the months they lived in California and the nonresident rules for the rest.²

Three conditions must all be true:

The tax you paid the other state is a net income tax. Gross receipts taxes, franchise taxes, and anything comparable to California’s alternative minimum tax do not count.¹
The income is sourced to the other state under California’s sourcing rules (starting at R&TC Section 17951), not under the other state’s view of the income.³
The tax was actually paid, not just withheld. Your credit is based on the final liability shown on the other state’s return, so if you get a refund from that state, your credit shrinks to match.¹

The sourcing rule is where remote workers get burned. If you work from your home in California for an employer based in another state, California treats that income as California-sourced because you performed the services here. The other state may tax it too, but California will not give you a credit on income it considers its own.

The Four Jurisdictions That Flip the Rule

Before filing Schedule S, check which state you paid. Arizona, Guam, Oregon, and Virginia handle double taxation in reverse. Under R&TC Section 18002, residents of those jurisdictions who earn California income claim their credit on a California nonresident return.³ The mirror image applies to you: if you are a California resident with income from Arizona, Oregon, Virginia, or Guam, you claim the credit on that state’s nonresident return, not on your California Schedule S. The FTB will deny a Schedule S claim for taxes paid to any of these jurisdictions.⁴

For every other state, the credit goes on your California return.

Which Income Counts

California’s sourcing rules decide eligibility, and they vary by income type.

Wages and Business Income

Wages are sourced to the state where you physically performed the work. If you commute or travel for work, only the portion tied to days worked in the other state qualifies. Sole proprietorship and self-employment income follow similar physical-presence rules, though allocation gets more involved for businesses operating across multiple states.

Capital Gains and Intangible Property

Gains from stocks, bonds, and other intangibles are generally sourced to the owner’s state of residence. For a California resident, that means those gains are California-sourced and will not support the credit, even when another state also taxes them. One exception: if the intangible property has acquired a “business situs” in another state because it was used as capital in a business there, the gain is sourced to that state and can qualify.⁵

Real property gains are sourced to the state where the property sits. Sell a rental in Nevada and the gain is Nevada-sourced; it qualifies if Nevada imposed an income tax on it.

Pass-Through Entity Income

If you receive a K-1 from a partnership, LLC, or S corporation that paid net income tax to another state, you can claim your share. S corporation shareholders qualify when the other state either does not recognize the S election or imposes a tax on the S corporation and the entity elected S status there. Attach the K-1 and a schedule showing your share of the tax paid.²

Pass-through entity elective tax paid to another state also qualifies. You can claim your pro-rata share as a credit if the entity’s payment meets the requirements of R&TC Sections 18001 and 18006.²

Taxes That Do Not Count

The FTB evaluates each tax using California’s income tax principles, not the other state’s label. Several common taxes are off-limits:

Local or municipal income taxes, such as New York City’s, do not qualify even though they’re income-based.²
Taxes comparable to California’s alternative minimum tax are excluded from both sides of the calculation.¹
Gross receipts and franchise taxes not measured by net income, like the Texas margin tax, fall outside the credit.
Federal taxes and taxes paid to foreign countries are handled on your federal return, not here. Only state-level U.S. taxes and taxes from U.S. possessions qualify.²

When another state imposes a blended tax with income and non-income components, the FTB separates them. Part of the tax may qualify while the rest does not.

Filling Out Schedule S

You need three things before starting: a finalized return from the other state showing the tax actually paid, a draft Form 540, and the current year’s Schedule S from the FTB website.² If more than one state taxed your income, complete a separate Schedule S for each and add the credits together.

Part I: Double-Taxed Income

Part I asks you to list each income item taxed by both states. Column (a) describes the income (wages earned in Oregon, gain on a Nevada property sale, partnership share, and so on), column (b) shows what California taxed, and column (c) shows what the other state taxed.² Line 1 totals carry into Part II.

Part II: Calculating the Credit

Part II applies two caps, and your credit is the smaller of the two:

The portion of the other state’s tax that corresponds to your double-taxed income as a share of total income taxed by that state.
The portion of your California tax that corresponds to your double-taxed income as a share of your California adjusted gross income.

Line 2 takes your California tax from Form 540, line 48, before this credit and before any PTE elective tax credit. Line 4 takes California adjusted gross income from Form 540, line 17. Line 7 is the net income tax liability you paid the other state after its own credits, excluding local taxes, federal and foreign taxes, and any AMT equivalent.² The ratios run from there, and line 12 is the final credit you carry to Form 540.

A frequent error is plugging total income into the ratio instead of double-taxed income. That mistake usually triggers an automated FTB adjustment.

Two Limits That Bite

The credit cannot reduce your California alternative minimum tax. It only offsets regular California net tax, less other credits.² If you owe AMT, this credit does nothing for that portion.

There is also no carryover. If your credit would exceed your California tax liability, the excess is lost; it does not roll to future years. This hurts most when out-of-state income is large relative to your total income and the other state’s effective rate exceeds California’s, because you end up absorbing some of the other state’s tax with no relief.

What to File and Keep

Attach Schedule S to your Form 540, along with a copy of the return you filed in the other state.² Most tax software bundles these together on e-file. On paper, place Schedule S and the other-state return directly behind the Form 540.

Keep both state returns and all supporting records for at least four years from the filing date. That matches the standard window the FTB has to examine your return and issue a notice of proposed assessment.⁶ If the FTB wants to verify the out-of-state tax, you’ll get a written request for documentation.

Adjusting the Credit After an Audit

If the other state audits and changes the tax you owed, your California credit changes with it. File Schedule X to report the adjustment. While the other state’s audit is still open, you can file a protective claim for refund by checking the appropriate box on Schedule X, Part II, and noting the pending determination.⁷ The protective claim preserves your right to a refund while the audit plays out.

The refund deadline is the later of one year from the date of overpayment or four years from the original return due date. If federal adjustments drove the change, you have two years from the date the IRS finalizes its adjustment.⁸ Miss the deadline and the refund is gone, regardless of the merits.

1
California Legislative Information. California Revenue and Taxation Code RTC 18001
2
Franchise Tax Board. 2025 Instructions for Schedule S
3
Justia. California Revenue and Taxation Code 18001-18011 – Credit for Taxes Paid
4
Franchise Tax Board. Other State Tax Credit
5
Franchise Tax Board. Residency and Sourcing Technical Manual
6
Franchise Tax Board. Keeping Your Tax Records
7
Franchise Tax Board. 2025 Instructions for Schedule X
8
Franchise Tax Board. Claim for Refund