Am I eligible for the Credit For Taxes Paid to Another State or Country?

When income is taxed by North Carolina for a period during which you are a legal resident of North Carolina and the same income is also taxed by another state or country because it was earned in or derived from sources within that state or country, a tax credit may be claimed. You must have already filed (or be currently filing) a return with the other state or country to claim this credit.

How do I determine the Tax Paid to the Other State or Country?

The amount of net tax paid is any prepayment of tax (tax withheld, estimated tax payments, amount paid with extension, etc.) plus any additional tax paid or less any refunds received or expected to be received.

You must have already filed (or at least completed) your other state return to have this amount. It's simply the amount of tax you were required to pay to the other state as shown on that state's return on income that's also being taxed by North Carolina.

What is the Bailey Settlement?

As a result of the North Carolina Supreme Court's decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local government or by the United States government retirees (including military). The exclusion applies to retirement benefits received from certain defined benefits plans, such as the North Carolina Teachers' and State Employees' Retirement System, the North Carolina Local Governmental Employees' Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees' Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989.

This exclusion also applies to retirement benefits received from the North Carolina's 401(k) and 457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. This exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions.

If you're entitled to exclude your retirement benefits under the Bailey Settlement, enter the amount of your excludable retirement benefits that were included in your federal taxable income.

Distributions from most types of retirement plans may be rolled over into another retirement plan or into an IRA. Because rollover distributions lose their character upon rollover, all distributions from a qualifying Bailey retirement account in which the employee / retiree was vested as of August 12, 1989, are exempt from state income tax regardless of the source of the funds contained in the account. Conversely, qualifying tax-exempt Bailey benefits rolled over into another retirement plan lose their character and would not be exempt upon distribution from the other plan unless the plan is a qualifying Bailey retirement account in which the employee was vested as of August 12, 1989.

Rollovers to IRAs will always result in a loss of tax-exempt status since IRAs do not qualify under the Bailey settlement.

What is use tax?

An individual owes consumer use tax on an out-of-state purchase when the item purchased is subject to North Carolina sales tax, and the retailer making the sale does not collect sales tax on the sale or the state sales tax rate imposed by the other state is less than the state sales tax rate imposed by North Carolina.

Out-of-state retailers that are not "engaged in business" in North Carolina are not required to collect North Carolina's tax. However, some out-of-state retailers voluntarily collect North Carolina tax as a convenience to their customers. Out-of-state retailers include mail-order companies, television shopping networks, firms selling over the internet, and other retailers.

Essentially if you bought something online and paid sales tax for it, then you don't have to pay use tax. But if you bought something online and paid no sales tax, then you used it while in North Carolina, you need to pay use tax on the item at the sales tax rate.

What are examples of items subject to North Carolina use tax?

Items subject to sales and use tax include but are not limited to the following:
  • Computers and other electronic equipment
  • Prewritten software including electronic downloads of software
  • Books, books on tape, and digital books delivered or accessed electronically
  • Audio compact discs, tapes, and records
  • Digital music delivered or accessed electronically
  • Magazines and newspapers including those delivered or accessed electronically
  • Clothing, appliances, furniture, home furnishings, sporting goods, and jewelry
  • Ringtones
  • Movies delivered or accessed electronically
  • Sales or recharges of prepaid telephone calling cards and phones

At what rate do I calculate my use tax?

The use tax is calculated at the same rate as the sales tax.

For January 1, 2014 through March 31, 2014, the rate was 7.5% in Durham and Orange Counties, 7.25% in Mecklenburg County, 7% in Alexander, Buncombe, Cabarrus, Catawba, Cumberland, Duplin, Edgecombe, Greene, Halifax, Haywood, Hertford, Lee, Martin, Montgomery, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry, and Wilkes Counties, and 6.75% in all other counties.

For April 1, 2014 through September 30, 2014, the rate was 7.5% in Durham and Orange Counties, 7.25% in Mecklenburg County, 7% in Alexander, Buncombe, Cabarrus, Catawba, Cumberland, Duplin, Edgecombe, Greene, Halifax, Harnett, Haywood, Hertford, Lee, Martin, Montgomery, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes Counties, and 6.75% in all other counties.

For October 1, 2014 through December 31, 2014, the rate was 7.5% in Durham and Orange Counties, 7.25% in Mecklenburg County, 7% in Alexander, Buncombe, Cabarrus, Catawba, Cumberland, Davidson, Duplin, Edgecombe, Greene, Halifax, Harnett, Haywood, Hertford, Lee, Martin, Montgomery, New Hanover, Onslow, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes Counties, and 6.75% in all other counties.

If you paid another state's sales or use tax that was legally due on out-of-state purchases, that amount may be credited against the North Carolina use tax due. Credit is allowed for another state's sales tax paid against the 4.75% North Carolina sales tax due. Separate credit is allowed for another state's local tax paid against the North Carolina local and transit sales and use tax due. You may not claim a credit for sales tax or value-added tax paid to another country.

What are estimated tax payments? What do I enter on this screen?

  • Enter any estimated tax payments you made for 2014.
  • Enter any amounts credited from your 2013 return.
  • Enter any amount prepaid with extension requests.

Do NOT enter any amount of your 2014 North Carolina Income Tax withheld by your employer(s) as shown on any wage or tax statements.

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