NC taxation of non resident pension

[Peter56]

I own property in North Carolina, but I am a non-resident.  None of my retirement (IRAs, etc.) income comes from North Carolina sources.  But it seems that the only retirement income I can shield from NC taxation is that which comes under the Bailey Settlement.  Which makes it appear that NC can tax the retirement income of a non-resident with no retirement income from NC sources.  Is that true?  When I say "retirement income", I am speaking of retirement benefits, not income from the property I own in North Carolina.

[NCperson]

@Peter56 -  I take it you do not live in NC and I will assume the NC property is income producing property.

The ONLY income you will report to NC is the income on the property - nothing else. (if the property is not income producing, there is no income to report to NC and thus no tax to NC). That would be the only NC sourced income. 

Since you are not living in NC, it will not tax any of your retirement income. 

You will report ALL your income to the state you live in and it will give you a credit for the tax liability in NC, if there is any, so that you are not paying tax on the same dollar to both states.  (the credit is the LOWER of what you pay NC or what the tax would have been in your state had there been nothing paid to NC).

does that help? 

[SteamTrain]

[Later edited based on some calculation steps I inverted accidentally]

One thing that confuses some folks is how NC (and many other states) do the non-resident tax calculations.  The NC forms will first apply the deductions (Std/Itemized) to ALL your income, as-if you are actually an NC resident. Then after those appropriate deductions, the form will then ratio-down the taxable income for you, as a non-resident, based on what sub-portion was earned/received from NC sources.   Thus, NC starts with your full Federal income, and then you need to tell the software (during the NC interview) what lower amount actually came from NC sources.

Very Crudely...As an NC nonresident, if you had 50,000 of gross income, and $500 NC-sourced income...NC first multiplies the gross NC-taxable income (after deductions) by 0.01  (i.e 500/50,000) to ratio-down your non-resident NC-taxable income, and the final tax is applied to that lower amount.

[NCperson]

@Peter56 - to add to @SteamTrain's comments, here is the non-resident form..  You will list all your income in column A, but only the NC sourced income in column B, which in your case would ONLY be the property income. (turbo tax will walk you through all this). 

then the percentage is calculated at the bottom on Line 24: that is the percent of your total income that is taxed in NC, which would represent the rental income only.  

chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.ncdor.gov/2023-d-400-schedule-pn-handwritten-version/open

[Peter56]

I agree, however:  in turbotax, I have to complete the Retirement Benefits Worksheet (it is a worksheet I keep for my records, but it affects my NC taxable income) on which I list my spouse's and my retirement benefits (pension, IRAs, etc.).  The only types of retirement benefits I can exclude from NC income on that worksheet are those defined by in the Bailey Settlement.  Basically, for my spouse and me, that is SS and Federal retirement benefits.  All else affects the ratio of NC-related income to total income, and hence the NC taxable income.  I talked with Turbotax and they told me that I should override the excludible lines and put in that which is not NC related retirement income.  That is fine with me, and I hope it is fine with NC department of revenue.  I am just wondering whether  NC thinks it can tax my Fidelity IRA distribution that is not in any way related to NC.

[NCperson]

@Peter56 - there should be a screen in the NC module that is called "NC income allocation".  Your federal income is in the left column and the NC income is in the right column.  You should entering ZERO for everything, except the rental income on the property you own which is sourced NC income. 

So for the NC column, the pension line box should be zero, the SS box should be zero, etc. 

I just ran a test using NC as my non-residential state and SC as my residential state.  It worked perfectly!

How much rental income is there?  There is a $25,500 standard deduction in NC (filing joint), so if your rental income is less than that, it is likely there there may be little to no tax due to NC.   But if there is, that should show as a credit on the other state's tax return.  (if it is SC, look on line 13 of the SC income tax return).

why do you think the only pension you can exclude is related to Bailey? none of the other pensions are NC sourced income so those are excluded as well, as is SS.   

does that help? 

[SteamTrain]

Yeah, thing is you shouldn't be using the NC Ret Ben worksheet at all (except possibly to tag the "Type" column as an "N" if not already set that way.) you need to be using the interview ONLY unless you are more experienced with the Forms Mode worksheets (many many years)

Yes, the final column for your pensions/401k/ IRA should be a zero (I'd guess...Unless ROTH accounts).

1)  Those are NOT deducted from the GROSS income included for calculating the NC initial tax (before being reduced later), and if you changed that final column to be the same as the Federally-taxable amount, then NC should complain and may well have a major problem with it.

(see first Picture below). 

2)   AND the Federally-taxable portion SS is taken out properly lower on the worksheet's page.

3)...THEN... If you go thru the whole actual NC non-resident interview Q&A, you take those $$ out as being NC-taxable during the allocation process.  (See second picture below.  For a retired person actually having some $10k of Part-time job work in NC as a nonresident)

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[NCperson]

@SteamTrain  perfect! that is the screen I was referring to!

[SteamTrain]

What I missed in the second "allocation" screen is having a Rental Property income line...that does have a non-zero value for this person as being NC income.  (might take me a long while to set that up......I've never done a rental property)

[Peter56]

There does seem to be a disconnect between the retirement benefits worksheet and the other forms for allocating non-resident income.  I did not voluntarily approach those retirement benefits worksheet, believe me, that was all turbotax,  but errors were detected when I did the review.  So I left the "type" blank and overrode the amounts eligible for NC deduction.  We will see how it works out.  Thanks for your input.  If I left that worksheet as you described it, with the letter "N", that would have increased my NC taxable income, which, I think, is not justified.

[NCperson]

@Peter56 delete the NC tax return and start over - follow the step x step instructions.  I did it that way and it was quite easy.....and I got the expected result....

[Peter56]

In Turbotax the Retirement Benefits Worksheet is linked to the tax calculation.  The only way I can exclude those retirement benefits it to override the amount eligible for NC deduction.  My net rental income is less than the $25500, but if I use that Retirement Benefits worksheet as shown in TT, the non-Bailey Settlement type retirement benefits get included in my NC income which results in a tax due NC.

[SteamTrain]

(edited out) YAhhhh ...have some of that procedure inverted.  Slightly different but effectively the same.

[SteamTrain]

1)  The Std (or itemized) Deduction is used against all your income first...including that Retirment income.  (Lines 1-12 of the form d-400)  

2) Then your income allocations, indicating only the Rental  $$ as NC income, is used to calculate the decimal amount (line 13 of the D-400) that NC uses as a multiplier to reduce your NC-taxable income to the value one Line 14 of the D-400

3) Then NC taxes the amount in line 14 at an ~5% level....resulting in your lower tax in line 15.

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Thus having rental income lower than the STD deduction isn't what determines whether your rental $$ will be taxed. You have to include almost all your income (except SS and a few other minor adjustments)) and apply the Std Ded to that., and if anything is left after that, then some of your rental net $$ will be taxed.

[NCperson]

@Peter56 suggest contacting TT via the 800 number and let them screen share.  I got it to work by following the step x step and it was quite easy.  With due respect, the software works without any overrides.