The required filing status for both states is shown below. As you can see they both require a married couple to use the filing status used on the federal return.
- Minnesota (MN) - You must use the same filing status on your state income tax return as on your federal return.
- North Carolina (NC) - The filing status claimed on the federal return must also be claimed on the North Carolina income tax return.
Here is what this means to you. First you must determine state residency, each of you. If both of you do not have the same residency, then filing as married filing separately may be the best. This could cause a higher tax all around, however it may be necessary because of the residency.
Domicile is the key word used by most states to determine residency. In your case each of you may have separate domiciles. Again this indicates that filing separately may be the logical choice.
- In the eyes of the law, a domicile can be a legal residence, the address from which one registers to vote, licenses a car, and pays income tax and where they plan to return.
If you do decide to file jointly, because your wife does consider herself a MN resident, then you may be eligible for a credit for taxes paid to another state.
State Returns - Assumes both states require income tax returns to be filed: Prepare the nonresident state first.
- Report the sale in the state where the property resides.
- Report it on your resident state and receive credit for taxes paid to another state.
Credit for taxes paid to another state is allowed by a resident state when the same income is being taxed to another state. Your resident state does not want you to pay tax twice on the same income. The credit that is allowed will be the lesser of:
- the tax liability actually charged by the nonresident state, OR
- the tax liability that would have been charged by your resident state
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