Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; Effect of North Carolina dependent children credit
Topic
Credits
Date Issued
03-04-1996
March 4, 1996
Re: Ruling Request: Individual Income Tax
Dear********
This will reply to your January 29, 1996 inquiry, in which you request a ruling regarding the Virginia credit for income tax paid to other states.
FACTS
North Carolina has recently enacted a new tax credit available to individuals with dependent children. You ask about the affect this credit will have on the computation of the Virginia credit for income tax Paid to another state.
RULING
Code of Virginia § 58.1-332(A) allows Virginia residents a credit against their tax income liability when they pay income tax to another state on earned or business income, or any gain from the sale of a principal residence. The intent of the credit is to grant Virginia residents relief in situations were they are taxed by both Virginia and another state on these types of income.
As a general rule, the resident is entitled to a credit for income tax paid to another state which is limited to the lessor of: (1) the amount of tax actually paid to the other state; or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state. However, when a Virginia resident pays income tax to North Carolina, a special rule can apply. If certain criteria are met, the limitation that restricts the credit to the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state is disregarded. In lieu of this limitation, Code of Virginia § 58.1-332(A) substitutes the following;
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- The credit allowable under this section shall not exceed: ... (ii) the income tax otherwise payable under this chapter in the event that the income upon which the tax imposed by the other state is computed is less than the Virginia taxable income upon which the tax imposed by this Commonwealth is computed and all income derived from sources outside the Commonwealth and subject to taxation under this chapter is earned income from a single state contiguous to Virginia .
The starting point for computing the North Carolina income tax is federal taxable income. Therefore, the special rule for computing the credit will apply to a Virginia resident who pays income tax to North Carolina if the resident derives only earned income from sources within North Carolina, and the resident does pay income tax to any other state. In such instances, the Virginia resident will be entitled to a credit equal to the lessor of: (1) the amount of income tax actually paid to North Carolina; or (2) 100% of their Virginia income tax liability.
Regardless of whether the general and special rule for determining the credit is applicable, the credit cannot exceed the income tax actually paid to another state. At issue here is what constitutes the income tax actually "paid" to North Carolina for the purposes of determining the credit provided by Code of Virginia § 58.1-332(A).
Under a new North Carolina law (N.C. Gen. Stat. § 105-151.24) effective for taxable years beginning on or after January 1, 1995, resident individuals are permitted a $60 credit for each dependent child provided their federal adjusted gross income does not exceed a certain level determined by filing status. Nonresidents and part-year residents are also eligible to claim this credit, but on a prorated basis. North Carolina law requires the credit be claimed after all other credits, except withholding and estimated tax payments. This credit reduces dollar-for-dollar the amount of North Carolina income tax imposed on an individual, but the credit is not refundable.
Because the dependent credit will reduce the amount of income tax that North Carolina imposes on a Virginia resident, it must be taken into consideration when the resident computes the credit for income tax paid to North Carolina. Therefore, the amount of tax actually "paid" by a Virginia resident to North Carolina will reflect the reduction in tax resulting from the North Carolina dependent credit.
Granting a Virginia resident a credit for income tax paid to another state for an amount in excess of the tax actually paid to the another state would be beyond the limitations set out under Code of Virginia § 58.1-332(A).
I trust this will answer your question; however, please contact***** at ****** if you have additional questions or if we may be of any further assistance.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP10878L
Rulings of the Tax Commissioner