Frequently Asked Questions Regarding Military Spouses

1. Under what conditions is the income received for services performed in North Carolina by the spouse of a servicemember exempt from North Carolina income tax?

The income earned for services performed in North Carolina by a spouse of a servicemember who is legally domiciled in a state other than North Carolina is not subject to North Carolina income tax if:

1. the servicemember is present in North Carolina solely in compliance with military orders,
2. the spouse is in North Carolina solely to be with the servicemember, and
3. the spouse is domiciled in the same state as the servicemember.

All three of the conditions must be met to qualify for the exemption. For tax years beginning January 1, 2018, the Veterans Benefits and Transition Act of 2018 amended the Servicemembers Civil Relief Act to allow the spouse of a servicemember to elect to use the same residence as the servicemember for state tax purposes. A spouse making this election will be considered to be domiciled in the same state as the servicemember. For more information, see Important Tax Information Regarding Spouses of United States Military Servicemembers.

2. Is the spouse of a servicemember who meets the conditions listed in #1 required to file a return to receive a refund of North Carolina income tax withheld?

Yes.

3. How does the spouse of a servicemember who meets the conditions in #1 exclude the earned income on the North Carolina return?

Complete Form D-400, Schedule PN, Part-Year Resident and Nonresident Schedule (and Form D-400, Schedule PN-1 if applicable). Because the income is not subject to North Carolina tax, do not include the income when completing Column B of the worksheet(s). Enter the applicable amounts on Lines 22-24 of Form D-400, Schedule PN, Part-Year Resident and Nonresident Schedule.  Enter the taxable percentage from Line 24 of Form D-400, Schedule PN, Part-Year Resident and Nonresident Schedule on Line 13 of Form D-400.

4. Is the spouse of a servicemember required to pay North Carolina income tax on income earned for services performed in North Carolina if the servicemember was stationed in a state other than North Carolina?

Yes, because the conditions listed in #1 would not have been met.

5. Can the spouse of a servicemember exempt any income other than income earned for services performed in North Carolina?

No.

6. What is "income for services performed" in North Carolina?

Salaries, wages, tips, professional fees, and other compensation received for personal services.

7. What type of income is not exempt from North Carolina income tax under the Act?

Income received from North Carolina sources attributable to the ownership of any interest in real or tangible personal property in North Carolina, or derived from gambling activities in North Carolina is subject to North Carolina income tax. In addition, income received from a partnership, S corporation, or sole proprietorship with income from North Carolina sources may also be subject to North Carolina tax.

8. If a servicemember and spouse are both domiciled in North Carolina but live in another state in compliance with military orders, are the servicemember and spouse required to file a return with North Carolina?

Yes, if the income exceeds the amounts shown on the Filing Requirements Chart of the income tax instructions, Form D-401.

9. The spouse of a servicemember has met the conditions to qualify for the exemption. However, the servicemember has been temporarily assigned to a combat zone. Can the spouse continue to exempt all income earned for services performed in North Carolina?

Yes, if the servicemember's assigned duty station remains North Carolina.

10. What information must a servicemember's spouse provide to the employer to qualify for exemption from North Carolina withholding tax?

The spouse must complete Form NC-4 EZ, Employee's Withholding Allowance Certificate, certifying that the spouse is not subject to North Carolina withholding because the conditions for exemption have been met. The spouse certifies the state of domicile and attaches a copy of the spousal military identification card and a copy of the servicemember's most recent leave and earnings statement to Form NC-4 EZ.

11. For how long is Form NC-4 EZ effective?

If claiming exemption from withholding, the certificate is effective for the remainder of the year and through February 15 of the succeeding year. A new certificate must be completed and given to the employer by February 15 to maintain exempt status for the following tax year. If a new Form NC-4 EZ is not provided by February 15, the employer is required to withhold based on single status with zero allowances. If, during the year, the spouse no longer meets the requirements for exemption on line 4, the spouse must complete a new Form NC-4 EZ.

12. The spouse of a servicemember has met the conditions to qualify for the exemption. However, the servicemember is transferred to another state in compliance with military orders and the spouse does not move to the other state. Do the wages of the spouse remain exempt from withholding?

No. The spouse must complete a new Form NC-4 EZ because the spouse no longer meets the conditions to qualify for exemption from withholding. Any other income earned by the spouse for services performed in North Carolina is subject to North Carolina income tax.

13. The servicemember is domiciled in another state but earns non-military income while stationed in North Carolina. Is the non-military income subject to North Carolina income tax?

Yes. Income received by a servicemember from non-military employment is subject to North Carolina income tax. In addition, income received from North Carolina sources attributable to the ownership of any interest in real or tangible personal property in North Carolina or derived from a business, trade, profession, or occupation carried on in North Carolina, or derived from gambling activities in North Carolina is subject to North Carolina income tax.