Pending Court Case May Affect ‘Double Income Tax’

A couple’s case addressing the taxation of out-of-state income by their resident state is currently pending in the United States Supreme Court.Comptroller of the Treasury of Maryland v. Wynne questions the circumstances under which income earned out-of-state may be taxed, whether tax credits exist and what they provide, and if these procedures comply with state and county tax clauses.

According to local news reports on state tax issues, “Maryland has argued in court documents that, among other points, it has the right as a sovereign state to tax the entirety of its residents’ income, regardless of where the income was generated or if taxes on that income were paid in other states.” Although the case is pending in Maryland, the outcome may set a precedent for other states.

North Carolina tax law provides that residents must pay income tax on money earned in state, and that residents must also pay income tax on money earned out-of-state. Out-of-state earnings may be subject to a ‘double tax’—tax paid to the state where the money was earned and tax paid to the state of residence.

This depends state tax laws in all states involved. For example, if an individual lives in Western North Carolina and works across the border in Tennessee, although Tennessee has no state income tax, the individual will need to pay North Carolina income tax on money earned. However, if the individual worked in South Carolina—a state that does impose income tax—a double income tax may be required. Usually, the taxpayer may elect to claim a tax credit in one state for the amount of tax that was paid in another. Generally the state with the higher tax rate is the state that will be paid tax and the credit will be claimed in the state with the lower rate. Some state tax requirements are waived or minimized for military personnel. Careful tax planning should be conducted annually with a tax lawyer familiar with laws in the respective states.

To determine how much income tax is owed to North Carolina and other states where income was earned, the North Carolina Department of revenue has provided instructions for claiming credit for income tax paid to another state. To ensure this is calculated properly, review documents with a North Carolina tax attorney.