Audited by NC 2023 from my error

[CHUCKles4me]

I filed my taxes electronically using TurboTax desktop for the past few years.   I'm retired from federal service and qualify for the Bailey Settlement in NC making me exempt from paying NC State tax on my CSRS annuity.   My wife retired from federal service in 2019 and I thought she qualified too.  We were audited by NC state DOR in 2023 going back 3 years from when my wife retired and I discovered that she was not eligible under Bailey.   She withdrew a sizable portion of her FERS annuity in 2019 and again in 2021.  We wound up paying NC close to $60,000 last year for 2019 - 2022.  I don't have anything from the state explaining the calculations and the determinations and I am confused about how much I can claim on this year's federal return.   Can I claim prior years or can I claim the lump sum we were charged in 2023?  And if so,  where is this entered?  I'm just about ready to throw in the towel and go pay H&R Block to do my taxes.   Can anyone help me with this?

[MonikaK1]

If you are asking how much you can claim as an exclusion from NC tax under the Bailey settlement for 2023:

When you enter your 2023 1099-R in the Federal return in the Income section of TurboTax

1. Under  Wages & Income, find IRA, 401(k), Pension Plan Withdrawals (1099-R).
2. Enter your Form 1099-R
3. Continue until you get to Where is your distribution from?
4. Select Bailey settlement retirement benefits for the 1099-R that qualifies. Don't select this for any retirement benefits that don't qualify.

Answer any related questions that appear in the North Carolina interview regarding the exclusion from state income for Bailey settlement benefits.

Income from a pension, 401(k), IRA or any other type of retirement account is all taxed at the North Carolina state income tax rate of 4.75%. Unlike many other states, North Carolina does not allow deductions on any type of retirement income. The income tax on pension income is paid through the state return.

The exception is for certain government retirement income. 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 governments or by the United States government retirees (including military).  

The exclusion applies to retirement benefits received from certain defined benefit 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.  

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

See this North Carolina DOR article for more information.

If you are asking how much you can claim as an itemized deduction on your Federal return for taxes paid to NC in 2023:

Enter your state taxes paid in 2023 in the Federal section of TurboTax under Deductions and Credits, then: 

1. Select Estimated and Other Taxes Paid
2. Select Income Taxes Paid
3. Select the appropriate choice for the additional state taxes you paid in 2023. You can select to which year the tax you paid applied.

Note that state tax deductions on the Federal return are limited to $10,000 under current law. You also would need to have enough itemized deductions to exceed your standard deduction.

Contact the North Carolina Department of Revenue if you are not sure how they calculated their audit adjustments or how much of the amount you paid constituted tax versus interest and/or penalty.

[CHUCKles4me]

We pais NC state taxes in 2023 $50,000+.  This was a lump sum payment to correct misfiled taxes from 2019.  Can I claim this on my federal return,?

[CHUCKles4me]

This is NOT what I am asking.   I understand about the Bailey Settlement.   I've been filing my taxes for 12 years claiming Bailey.   Thought my wife could too, but she doesn't qualify.  We were audited and paid a lot of money last year to NC Department of Revenue.   Can I claim that amount paid under the audit we paid in 2023?  The audited amount was for tax years 2019, 2020, 2021, and 2022, but we paid a lump sum payment.   NC has not provided us with any paperwork explaining the amount,  only a cover letter with the total amount owed. 

[KrisD15 · Accepted solution]

Yes

go to Deductions & Credits

Scroll down to Estimates and Other Taxes Paid

Select START for "Other Income Taxes"

Scroll down to "Other Income Taxes Paid in 2023"

Select START for "Payments for 2021 or a prior year state or local income taxes paid in 2023"

Only enter tax paid, no interest or penalties