Who Needs to File D-400 Schedule PN and How to Complete It

Filing taxes in North Carolina can be complex for those who lived in the state for only part of the year or earned income from multiple states. The D-400 Schedule PN form ensures taxable income is fairly allocated, preventing overpayment or underreporting.

Who Files Schedule PN

Certain taxpayers must file Schedule PN to report income earned inside and outside North Carolina. This applies to individuals who moved in or out of the state during the tax year or earned income from North Carolina sources while residing elsewhere. The form ensures only the appropriate portion of income is taxed by North Carolina.

Part-year residents must divide their income based on their residency period. This affects wages, business income, and rental earnings. Nonresidents with North Carolina income, such as remote workers, contractors, or property owners, must also file Schedule PN. Even if they never entered the state, income derived from North Carolina activities remains taxable.

Income Allocation

Taxpayers must allocate income between North Carolina and other states based on residency and earnings sources.

Part-Year Residency

Those who lived in North Carolina for only part of the year must allocate income accordingly. Earnings while a resident are fully taxable, while income from the nonresident period is generally excluded unless sourced from North Carolina.

For example, if a taxpayer moved to North Carolina on July 1 and earned $80,000 for the year—$35,000 before the move and $45,000 after—only the $45,000 is taxable in North Carolina. Rental or business income must also be allocated based on when it was received.

Taxpayers should keep records like pay stubs or employer statements to support their allocation, as the North Carolina Department of Revenue (NCDOR) may request documentation if reported amounts do not match employer-reported data.

Nonresident Earnings

Nonresidents must report only the portion of their income attributable to North Carolina. This includes wages for work performed in the state, business income from North Carolina operations, and rental or investment earnings from North Carolina properties.

For instance, a South Carolina resident commuting to a job in Charlotte and earning $50,000 from a North Carolina employer must report the full amount. However, if they worked remotely from South Carolina part of the year, only the income earned while physically in North Carolina is taxable. Employers typically indicate this breakdown on W-2 forms, but taxpayers should verify its accuracy.

Self-employed individuals must allocate income based on where services were performed. If a Virginia-based consultant provided services to North Carolina clients, only work completed in North Carolina is taxable. Contracts or invoices can help substantiate this allocation.

Multi-State Wages

Those who worked in multiple states, including North Carolina, must determine the portion of wages attributable to North Carolina. This is relevant for individuals who travel for work or have multiple job locations.

One common method is workdays. If an employee worked 200 days in a year and spent 50 in North Carolina, 25% of their wages are allocated to North Carolina. For example, if total earnings were $100,000, then $25,000 is subject to North Carolina tax.

Employers may provide a state-specific earnings breakdown on W-2 forms, but if not, taxpayers should maintain a log of work locations and dates. This is especially important for remote workers who spent time in North Carolina for business travel or temporary assignments.

Failure to properly allocate multi-state wages can result in overpayment or underreporting, both of which can lead to tax issues. Taxpayers should review state reciprocity agreements, if applicable, to avoid double taxation on wages earned across borders.

Adjustments and Deductions

Taxpayers may qualify for adjustments that reduce their taxable income in North Carolina.

One common adjustment involves retirement income. North Carolina does not tax Social Security benefits, but other retirement income, such as pensions or 401(k) withdrawals, may be partially or fully taxable depending on residency status. Only the portion received while residing in North Carolina is taxable.

Deductions also impact taxable income. North Carolina allows a standard deduction or itemized deductions, with different rules from federal guidelines. For 2024, the standard deduction is $12,750 for single filers and $25,500 for married couples filing jointly. Mortgage interest and property taxes are deductible, but state income taxes paid to other states are not.

Education-related deductions can also affect tax liability. North Carolina offers a deduction for contributions to NC 529 college savings plans, which differs from federal rules. Taxpayers who contributed to a 529 plan while living in another state may need to adjust their deduction eligibility.

Business owners must account for state-specific deductions. North Carolina allows deductions for certain business expenses, including depreciation, but does not conform to federal bonus depreciation rules. Taxpayers must adjust depreciation calculations when reporting business income.

Credits from Other States

Taxpayers who owe income tax to both North Carolina and another state may qualify for a credit to prevent double taxation.

The credit is limited to the lesser of the tax paid to the other state or the amount of North Carolina tax on the out-of-state income. For example, if a taxpayer earned $50,000 in another state with a 5% tax rate, they would owe $2,500 to that state. If North Carolina’s tax on the same income amounts to $2,300, the credit is capped at $2,300, meaning the taxpayer still pays the $200 difference to the other state.

Some states impose taxes differently from North Carolina’s flat 4.75% rate (as of 2024), which can complicate credit calculations. Progressive tax structures or local income taxes in certain states may lead to higher overall tax burdens, and North Carolina does not provide a credit for local taxes imposed by cities or counties.

Penalties for Incorrect Filings

Errors on Schedule PN can lead to penalties, interest charges, and increased scrutiny from the NCDOR.

Miscalculating North Carolina taxable income due to incorrect residency classification or improper income allocation can result in an underpayment penalty, typically 10% of the unpaid tax. If the underpayment is deemed intentional or fraudulent, the penalty increases to 50%, with potential criminal charges in extreme cases.

Late or inaccurate filings can also trigger interest charges, which accrue daily on any unpaid balance from the original due date. As of 2024, the interest rate on unpaid taxes is set by the NCDOR and adjusted periodically based on federal short-term rates.

To avoid issues, taxpayers should review filings carefully, maintain detailed records, and seek professional assistance if they have complex multi-state income situations.