Credit for Income Tax Paid To Another State or Country A tax credit is allowed to an individual who is a resident of North Carolina for tax imposed by and paid to another state or country on income that is also taxed by North Carolina, subject to the following conditions: The income must have been derived from sources in the other state or country and must have been taxed under the laws of the state or country, regardless of the legal residence of the taxpayer. The credit allowable is the smaller of either the net tax paid to the other state or country on income also taxed by North Carolina or the product obtained by multiplying the North Carolina tax computed before the credit by a fraction in which the numerator is the part of the North Carolina income, as adjusted, which is taxed in the other state or country and the denominator is the total income as adjusted, received while a resident of North Carolina. If credits are claimed for taxes paid to more than one state or country, a separate computation must be made for each state or country and the separate credits combined to determine the total credit. Receipt or other proof showing payment of income tax to the other state or country and a copy of the return filed with the other state or country must be submitted with the North Carolina return. No credit is allowed for income taxes paid to a city, county, or other political subdivision of a state or country or to the federal government. Some foreign countries do not require individuals to file income tax returns. Instead, their income tax liability is paid through withholding. The Department will accept evidence of the withholding to substantiate the tax credit. If any tax for which a resident has claimed a tax credit on the North Carolina income tax return is refunded at any time by the other state or country, a tax equal to that portion of the credit allowed for the taxes credited or refunded by the other state or country is due and payable and is subject to penalties and interest. After completing the return of the other state, complete your North Carolina return and include all income from inside and outside the State. Compute your tax as though no credit is being claimed. Complete Part 1 of Form D-400TC to determine the allowable tax credit. A common mistake is to enter on Line 6 of Part 1 the total tax withheld by the other state or country. The amount entered on Line 6 of Form D-400TC must be the tax paid to the other state or country less any refund received, or expected to be received, from the other state or country. The credit cannot be more than your North Carolina tax liability; therefore, you must complete Part 3 of Form D-400TC to limit the credit to the tax liability. For more information, see the Personal Tax Division Bulletins.