I moved from Illinois to North Carolina in mid 2017. In mid 2018 my former employer paid me for unused vacation and sick time. Taxes were withheld for Illinois, not for North Carolina.
My thought is that since I didn't live in Illinois in 2018 that the tax should have been withheld for North Carolina and I would include the income with my North Carolina income tax return. I would also file a Non-Resident Illinois tax return to receive a refund of the tax withheld there.
I asked my former employer about this and was told that the vacation and sick time was earned while I was a resident of Illinois, so the tax was correctly withheld. Is this correct? If so, do I need to include this income on my North Carolina tax return, which would mean both states are taxing the same income? Would I also need to file a Non-Resident tax return with Illinois?
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Unfortunately, your former employer is correct. The vacation and sick time were earned while you were employed in IL, and are considered IL income.
For 2018, you will file an IL non-resident return to report the payments from your former employer. You will also file a NC resident return to report your total income, but then make an adjustment for the IL income and associated tax. When completing your state returns in TurboTax, it is important to complete the IL non-resident return first so the appropriate credit can be applied to your NC return. This prevents the double-taxation that you mentioned in your question.
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