Properly allocating lost wages settlement in another state

[ErikJ]

My client, an AZ resident, was awarded a settlement from a court in CA for lost wages. He was issued a W2.

Maybe it's a foggy brain day, but he shouldn't have to pay both income taxes to both states, should he? When I try to enter the information, he has a tax liability in both states.

[sjrcpa]

One state will give a credit for tax paid to the other state.

[BobKamman · Accepted solution]

California will credit some or all of the taxes owed to Arizona.  There will probably still be some owed to California, though, because of its higher tax rates on most incomes.  

[gma]

I would make sure that the California return is done as a non resident and the income received should be refunded to the taxpayer and non taxable to California because they were an Arizona resident at the time.  Not positive, but thats my take.

[BobKamman]

That would be true if this were a pension.  

"On Jan. 10, 1996, Congress enacted the Pension Source Tax Act of 1996 (P.L. 104-94). This law specifically stipulates that, "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State." While the Source Tax law still allows individual states to define residency on their own terms, it prohibits any state from taxing non-residents for pensions earned within the state. If you earn a pension in Vermont, for instance, then retire to New York, Vermont may not tax your pension income."

https://finance.zacks.com/pay-taxes-pensions-state-retired-state-living-in-8131.html

But it's not.  If Congress had wanted to exempt the $250,000 bonus paid in February to an employee who left the company and the state last June, they could have.  They didn't.