Tax Professionals Handbook

• Imperfect Returns: Imperfect returns are those containing a dependent SSN that does not appear in the IRS master SSN file. The IRS will allow the return to be e-filed provided the preparer or taxpayer flags the return to acknowledge verification of the SSN as a valid SSN and request the IRS to accept the file. If the return is not flagged (e.g. the checkbox has not been marked), the return will still be rejected.
• Join Return Option: Previously, a husband and wife who filed a joint federal return was required to file a separate return if one spouse was a nonresident with no North Carolina income. For 2006, a husband and wife who filed a joint federal return will have the option of filing a joint North Carolina return. They will still have the option of filing a separate return if they so choose.
• The employment relate expenses for determining the State child care credit have been conformed to the federal amounts of $3,000 for one qualifying child and $6,000 for two or more qualifying children. Previously, the North Carolina amounts were $2,400 and $4,800.
• The time for filing an amended income tax return to report federal changes has been reduced from two years to six months. (This also applies to Estate and Gift returns.)
• Time for Filing Returns by Nonresident Aliens: This law was amended to conform the filing date for certain nonresident aliens to the date those individuals are required to file their federal income tax returns. Consequently, a return of a nonresident alien who has wages not subject to withholding is due on the 15th day of the 6th month after the close of the tax year (June 15 in the case of a calendar year taxpayer). A nonresident alien who has wages subject to withholding must file a return by the 15th day of the 4th month following the close of the tax year.
• Tax credit for recycling oyster shells: The credit is $1.00 per bushel of oyster shells donated to the Division of Marine Fisheries of the Department of Environment and Natural Resources. This subdivision added to require an addition to federal taxable income. The credit may not exceed the amount of tax for the taxable year reduced by the sum of all credits allowable, except payment of tax made by or on behalf of the taxpayer. Any unused portion of the credit can be carried forward for the succeeding five years. To support the credit, a taxpayer must obtain a certification by the Department of Environment and Natural Resources stating the number of bushels of oyster shells that were donated. (Effective for taxable years beginning on or after January 1, 2006 and expires for taxable years beginning on or after January 1, 2011.)
• An addition to federal taxable income is required for a shareholder’s share of built-in gains tax that a S-Corporation paid for federal income tax purposes.
• The amount that can be designated to the NC Political Parties Financing Fund has been increased from $1.00 to $3.00. ($6.00 on a joint return)
• Credit for Certain Real Property Donations: Under G.S. 105-269.15(a), the maximum dollar limit on a tax credit applies to the partnership as a whole rather than to each of the individual partners. The 2001 General Assembly made an exception to this provision for partnerships claiming the tax credit for real property donations so that the dollar limit on the amount of tax credit will apply to the individual partners instead of the partnership. The exception was set to expire for taxable years beginning on or after January 1, 2006. However, the 2006 General Assembly amended this subsection to extend the exception until tax years beginning on or after January 1, 2007. (Effective July 10, 2006; SC 1741, s 24.15 (a), S. L. 2006-66.
• Personal Exemption Adjustment: The Personal Exemption adjustment is increased from $700 to $800 per exemption for taxpayers with Adjusted Gross Incomes less than: MJF $100,000; HH $80,00; Single $60,000; and MSF $50,000. For taxpayers with AGI more than the filing status amounts shown above, the Personal Exemption adjustment is increased from $1200 to $1300 per exemption.
• The 2006 State Standard Deduction amounts are the same as the 2005 tax year:

• There are four new and/or revised check boxes on the D-400 for 2006. a) “Fill in circle if return is filed and signed by Executor or Administrator.” b) “Fill in circle if you were a U.S. citizen or resident and you were out of the country on April 15.” c) “Fill in circle(s) if you or your spouse were nonresidents of North Carolina for the entire year.” d) “Fill in circle(s) if you or your spouse moved into or out of North Carolina during the year and enter the dates of residency in the boxes.”
• “Computation of North Carolina Taxable Income for Nonresidents and Part-Year Residents” – This area has been revised to indicate the following. Line 48: Enter the amount from Column B, Line 30 of the Nonresidents/Part- Year Resident Worksheet on Page 13 of the Instructions. Line 49: Enter the amount from Column A, Line 30 of the Nonresidents/Part- Year Resident Worksheet on Page 13 of the Instructions. Line 50: Divide Line 48 by Line 49 (Enter the result as a decimal amount here and on Line 12; round to four decimal places.)
• Credit for Property Taxes Paid on Farm Machinery: This statute was amended to change the definition of farm machinery from machinery subject to State sales tax at the rate of 1% to machinery that is exempt from State sales tax.
• Credit for Charitable Contributions by Nonitemizers: Under the prior law, the charitable contribution credit may not be claimed for contributions for which the credits for certain real property donations and gleaned crops are claimed. This section was amended to include contributions for which the credit for recycling oyster shells was claimed. Therefore, the credit for charitable contributions and the credit for donating real property, gleaned crops, or oyster shells may not be claimed for the same donation. Note: Effective for taxable years beginning on or after January 1, 2006 and expires for taxable years beginning on or after January 1, 2011.
• Repeal of the 8.25% Tax Rate to be Accelerated: This subsection was amended to repeal the 8.25% income tax rate that applied to higher income taxpayers in two phases. The rate will be reduced to 8% for tax years beginning on or after January 1, 2007 and to 7.75% for tax years beginning on or after January 1, 2008. The 8.25% rate was scheduled to expire on January 1, 2008.
• G.S. 134.6(d) (4) and (5) - Parental Savings Trust Fund Deduction: Subdivisions (4) and (5) were added as new adjustments required in calculating North Carolina taxable income. Subdivision (4) provides a maximum deduction of up to $750 ($1500 for married individuals filing a joint return) for contributions to an account in the Parental Savings Trust Fund of the State Education Assistance Authority established pursuant to G.S. 16-209.25. The Deduction is allowed only if federal adjusted gross income is less than the Following amounts (Married Filing Jointly/Qualifying Widow(er) - $100,000; Head of Household- $80,000; Single - $60,000; and Married Filing Separately $50,000). Subdivision (5) requires an addition to taxable income for any amounts that were contributed to the Parental Savings Trust Fund and deducted in a prior year that were withdrawn and used for purposes other than the qualified higher education expenses of the designated beneficiary unless the withdrawal was due to the death or permanent disability of the designated beneficiary.

REMINDERS:

• The taxpayer does not have to submit any supporting documentation for an e-filed return, i.e. Bailey settlement, Other deductions from federal taxable income, Other additions to federal taxable income, 1099s, etc. The Department will contact the taxpayer if any supporting documentation is needed.
• The taxpayer is required to submit the form NC-478 and series A thru I. All forms NC-478 and series A thru I should be mailed to the North Carolina Department of Revenue, P O Box 25000, Raleigh NC 27640-0001 within 48 hours after filing the e-file individual income tax return.

Individual Income Tax Credits Associated with the NC-478 and Series

• Credit for investing in machinery and equipment
• Credit for creating jobs
• Credit for research and development
• Credit for worker training
• Credit for investing in central office or aircraft facility property
• Credit for technology commercialization
• Credit for development zone projects
• Credit for nonhazardous dry-cleaning equipment
• Credit for investing in low-income housing
• Credit for use of North Carolina ports
• Credit for investing in renewable energy property


• The taxpayer is required to submit the form NC K-1 to the NCDOR for an e-filed return if tax is withheld by a partnership for a nonresident taxpayer. The form should be mailed to the North Carolina Department of Revenue, P O Box 25000, Raleigh NC 27640-0001 within 48 hours after filing the e-file individual income tax return.
• Direct Deposit: The North Carolina direct deposit should not be connected to RALs nor Bonus Checks.(G.S. 143.3.3 – Prohibits RAL on State Refund). The NC direct deposit is a true direct deposit, which requires a checking or savings account number and a routing transit number from the taxpayer that can show acceptable proof-of-account of their designated financial institution. During the 2005 tax season, the Department experienced taxpayers not receiving the direct deposit of the State refund timely or at all. We discovered the State refund was processed as a RAL deposit. RAL accounts are temporary accounts and in some instances, deposits could not be made before these accounts were closed.