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OK, I am way confused about this one and am turning to Fooldom. Hopefully there's someone who's been in this situation before.

I am a resident of Arizona. Between January and July 2001, I had a co-op/internship in California. I have since moved back to Arizona to finish my degree.

Here's the quick synopsis:
1) I am a non-resident of California (that much I can figure out).
2) I have ~$20K income earned from said co-op in California.
3) On my W-2, this ~$20K is taxed as follows:
Federal: $20K income, $3K tax withheld (boxes 1 and 2)
Arizona: $17K income, $700 tax withheld (boxes 15 and 16)
California: $2.5K income, $125 tax withheld (boxes 15 and 16 on second W-2)
4) I also have ~$4K of self-employed consulting income (1099-MISC) earned in Arizona which California doesn't care about.

Now, California law says that all income earned within California has to be claimed. To me, that means the whole $20K. It's the fact that the state incomes were split that has me confused.

I see a couple ways to file this on my state returns:

1) $20K on both California and Arizona forms. Deduction taken for state income taxes withheld by the opposite state.
2) Claim income based on the W-2 info ($17K to CA, $2.5 to AZ). This seems like it would be audit prone.

I've been staring at this stuff for too long. Where's that flat tax when you need it? =)

Thanks in advance for any help or guidance,
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