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Clarification needed for NC State for "addition to income in NC handled differently from Federal"

Forum|Forum|1 year ago
March 18, 2025
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There is a question on the NC return that is very confusing because if you enter income as stated in the "learn more" help topic, you end up getting taxed on NC income that is supposed to be exempt.

Its under "Addition to income in NC handled differently from Federal"

You are prompted to enter Expenses Allocable to Income Exempt or Excluded From Gross Income

but under the "Learn More" it says

Enter the amount of expenses allocable to income NOT SUBJECT to North Carolina income tax.

This makes absolutely no sense, why would I want to add income that should not be taxed in NC? This flows directly to the NC taxable income!

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Best answer by LenaH

An example that North Carolina gives here are expenses connected with Interest Income from United States Obligations - Under G.S. 105-130.5(b)(1), interest income from obligations of the United States or its possessions is excludable from North Carolina taxable income to the extent such income is included in federal taxable income. Expenses incurred in producing the exempt income must be determined and subtracted from the gross amount earned during a taxable period before the deduction is made in computing the state taxable income.

@crash12_mn

LenaH

It is not prompting you to enter income exempt or excluded from gross income. It is prompting you to enter expenses allocable to income exempt or excluded from gross income. In other words, if an income source is exempt from NC tax, then the state does not want any deductions relating to that exempt income to be deducted (in addition to the income being exempt). Therefore, you'd have to add those deductions back when calculating your taxable income.

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P

Pip_12_mnAuthor

@LenaH

Thank you this kind of helps.

Can you please give an example of a specific expense that would be pertinent to this question?

Sometimes an example is worth a thousand words!

LenaHAnswer

An example that North Carolina gives here are expenses connected with Interest Income from United States Obligations - Under G.S. 105-130.5(b)(1), interest income from obligations of the United States or its possessions is excludable from North Carolina taxable income to the extent such income is included in federal taxable income. Expenses incurred in producing the exempt income must be determined and subtracted from the gross amount earned during a taxable period before the deduction is made in computing the state taxable income.

@crash12_mn

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