Credit for Income Tax Paid to Another State or Country (G.S 105-151)

A tax credit is allowed to an individual who is a resident of North Carolina for tax imposed by and paid to another state or country on income that is also taxed by North Carolina, subject to the following conditions:

a. The income must have been derived from sources in the other state or country and must have been taxed under the laws of that state or country, regardless of the legal residence of the taxpayer. b. The credit allowable is the smaller of either the net tax paid the

other state or country on income also taxed by North Carolina or the product obtained by multiplying the North Carolina tax computed before credit by a fraction in which the numerator is the part of the North Carolina income, as adjusted, which is taxed in the other state or country and the denominator is the total income as adjusted, received while a resident of North Carolina. If credits are claimed for taxes paid to more than one state or country, a separate computation must be made for each state or country and the separate credits combined to determine the total credit. c. Receipt or other proof showing payment of income tax to the

other state or country and a true copy of the return filed with the other state or country must be submitted with the North Carolina return. No credit is allowed for income taxes paid to a city, county, or other political subdivision of a state or country or to the federal government.

d. If any tax for which a resident has claimed a tax credit on the North Carolina income tax return is refunded at any time by the other state or country, a tax equal to that portion of the credit allowed for the taxes credited or refunded must be paid to North Carolina within thirty days of the date of receipt of this refund or notice of the credit.

The tax credit allowed to a North Carolina resident is determined as follows:

Portion of total federal income while a resident of N.C., as adjusted, that

was taxed by another state or country x N.C. income tax = Tax credit Total federal income while a

resident of N.C., as adjusted

After making the computation by use of this formula, the tax credit allowed is either the credit obtained by use of the formula or the actual amount of net income tax paid to the other state or country, whichever is the smaller.

Example 1: A full-year resident of North Carolina files a 2009 North Carolina return as a single individual. His total income is $37,000. He worked temporarily in South Carolina, earning $5,000 on which he paid tax of $131 to South Carolina. The taxpayer claimed the standard deduction in computing his federal taxable income of $27,650. The credit against his North Carolina income tax is determined as follows:

Federal taxable income ... $ 27,650 State standard deduction and

personal exemption adjustment ... 3,850 North Carolina taxable income ... $ 31,500 North Carolina tax due ... $ 2,079 Less tax credit:

Portion of total federal income, while a resident of N.C., as adjusted, taxed by

another state $ 5,000 x 2,079 = $ 281 Total federal income, $37,000

as adjusted, while a resident of N.C.

Since the $131 tax paid to South Carolina is less than the computed tax credit of $281, the allowable tax credit is the actual tax

paid to South Carolina ... $ 131 N.C. tax due ... $ 1,948

Example 2: A husband and wife are both residents of North Carolina and file a joint 2009 North Carolina income tax return. Their total income is $40,000, $5,500 of which was received from rental property, owned jointly, in Virginia. A total of $2,000

was received by the husband for temporary employment in South Carolina. The taxpayers claimed the standard deduction in computing their federal taxable income of $21,300. They paid tax of $290 on the income earned in Virginia and the husband paid tax of $102 on the income reported to South Carolina. The credit against their North Carolina income tax is determined as follows:

Federal taxable income ... $21,300 State standard deduction and

personal exemption adjustment ... 7,700 North Carolina taxable income ... $29,000 North Carolina tax due ... $1,819 Less tax credit:

Portion of total federal income while a resident of N.C., as adjusted, taxed by

Virginia $5,500 x 1,819 = $ 250 Total federal income, $40,000

as adjusted, while a resident of N.C. Portion of total federal income while a resident of N.C., as adjusted, taxed by

South Carolina $2,000 x 1,819 = $ 91 Total federal income, $40,000

while a resident of N.C., as adjusted

Total credit ... $ 341 Net North Carolina tax due ... $ 1,478 The computed credits are allowed since each is less than the amount paid to the other state.

Example 3: Taxpayer, a single man, became a North Carolina resident on June 1. Prior to moving to North Carolina, he earned $4,000 in South Carolina. From June 1 through December 31, he earned $6,000 in South Carolina and $10,000 in North Carolina. He paid income tax to South Carolina of $400 on the $10,000 South Carolina income. The taxpayer claimed the standard deduction in computing his 2009 federal taxable income of $10,650. His tax credit is determined as follows:

Federal taxable income ... $ 10,650 State standard deduction and

personal exemption adjustment ... 3,850 North Carolina taxable income before part-year

resident adjustment ... $ 14,500 Total federal income, as adjusted, while a

N.C. resident plus total income from N.C. sources while a nonresident

as adjusted $16,000 x $14,500 = $11,600 Total federal income $20,000 N.C. taxable

from all sources, income

as adjusted

North Carolina taxable income ... $ 11,600 North Carolina tax on $11,600 taxable

income ... $ 698 Less tax credit:

Portion of total federal income, while a N.C. resident, as adjusted,

taxed by S.C. $ 6,000 x $698 = $262* Total federal income $16,000 N.C. tax while a N.C.

resident, as adjusted

(*The computed credit is determined only with respect to income while taxpayer is a resident of North Carolina.)

S.C. income

taxed by N.C. $ 6,000 x $400 = $240** Total S.C. income $10,000 S.C. tax

Since the $240 tax paid to South Carolina on income also taxed by North Carolina is less than the $262 computed credit, the allowable

credit is ... $ 240 Net tax due North Carolina ... $ 458 (**Since a part of the tax paid South Carolina was on income not taxed by North Carolina, this computation is necessary to determine that portion of the South Carolina tax that was paid on income also taxed by North Carolina.)