Individual Taxes

Individual Taxes

Personal Income Tax

North Carolina taxable income is taxable income as calculated for federal income tax purposes, with certain adjustments.

Adjustments to Taxable Income

Deductions. An amount is deducted from taxable income to the extent each item listed below was included in federal gross income or was not deducted from federal gross income.

• Interest upon direct obligations of the United States; its possessions; the state of North Carolina; political subdivisions of the state of North Carolina; or nonprofit educational institutions organized or chartered under the laws of the State.
• Interest upon obligations which are exempt from tax under North Carolina law. For example, interest on obligations of the North Carolina Housing Finance Agency and the North Carolina Educational Facilities Finance Agency are exempt from the personal income tax.
• Social Security benefits and Railroad Retirement Act benefits.
• Refunds of state, local, and foreign income taxes.
• 20% of amounts added to North Carolina taxable income in taxable year 2008 as accelerated depreciation.  For taxpayers who made the add-on for bonus depreciation on their 2009 returns, the deduction applies to the first four taxable years beginning on or after January 1, 2010.
• Generally retirement benefits received by retirees of the state of North Carolina and its local governments or by retirees of the United States government (including military) are exempt if the retiree had five or more years of creditable service as of August 12, 1989. The exclusion also applies to retirement benefits received from the State’s §401(k) and §457 (deferred compensation) plans if the retiree contributed to the plan prior to August 12, 1989.
• Up to $4,000 in state, local, or federal government retirement benefits if the retiree did not have five years of creditable service as of August 12, 1989, or if the benefits are received from another state and its local governments, and up to $2,000 in private retirement benefits received by an individual taxpayer. (Note: No more than $4,000 in total retirement benefits can be deducted for each taxpayer in this group.)
• The amount by which a taxpayer’s federal tax deductions were reduced because of a federal tax credit, when a similar state tax credit does not exist.
• Severance wages received by a taxpayer from an employer as a result of the taxpayer’s permanent, involuntary termination from employment through no fault of the employee.  The amount of severance wages deducted as the result of the same termination may not exceed $35,000 for all taxable years in which the wages are received.
• Inheritance tax and estate tax paid to North Carolina on an item of income in respect of a decedent.
• Taxpayers may deduct up to $2,500 ($5,000 on joint return) of amounts contributed to the Parental Savings Trust Fund (North Carolina’s 529 plan) regardless of their income level. Effective for tax years beginning on or after January 1, 2012, the adjusted gross income levels are reinstated.
• An unpaid volunteer firefighter or an unpaid volunteer rescue squad worker may deduct $250. An unpaid volunteer firefighter or rescue squad worker who attended at least 36 hours of drills and meetings during the taxable year qualifies for the deduction. For a return of a married couple filing jointly, each spouse may qualify separately for the deduction.

Additions. An amount is added to taxable income to the extent each item listed below was not included in gross income or was deducted from gross income.

• Interest upon obligations of other states and their political subdivisions.
• Any state, local, or foreign income tax or general sales tax deducted on the federal return to the extent that total federal itemized deductions exceed the North Carolina standard deduction.
• Any amounts deducted from gross income and taxed under the Internal Revenue Code by a tax other than the tax imposed in Section 1, such as lump-sum distributions from a pension or profit-sharing plan.
• Income from domestic production activities.
• Any amount contributed to the Parental Savings Trust Fund (North Carolina’s 529 Plan) and deducted in a prior year that was later withdrawn and used for purposes other than qualifying higher education expenses of the designated beneficiary unless the withdrawal was due to the death or permanent disability of the designated beneficiary.
• An amount equal to 85% of the 50% bonus depreciation (special accelerated depreciation) deducted on the 2008 or 2009 federal return for certain property acquired and placed in service on or after January 1, 2008 and before January 1, 2010. An addition is also required on the 2008 return for 85% of any additional first-year depreciation deducted on the 2007 fiscal year return for property acquired and placed in service on or after January 1, 2008.

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Personal Exemption Amounts

North Carolina allows a personal exemption of $2,500 for the taxpayer (unless he is claimed as a dependent on someone else’s return) and $2,500 for each dependent provided that the taxpayer’s federal adjusted gross income is less than the threshold amount for his filing status, as shown below.

Filing Status	Federal AGI
Married, filing jointly	$100,000
Head of household	$80,000
Single	$60,000
Married, filing separately	$50,000

A taxpayer whose federal adjusted gross income is equal to or greater than the threshold amount for his filing status is allowed a personal exemption of $2,000 (unless he is claimed as a dependent on someone else’s return) and $2,000 for each dependent. An addition to federal taxable income must be made for the difference between the federal and State personal exemption amounts.

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Standard Deduction Amounts

North Carolina allows a basic standard deduction that does not include the cost-of-living adjustment permitted under federal law. This adjustment amount must be added back to taxable income. The standard deduction amounts are:

Filing Status	Amount
Married, filing jointly	$6,000
Qualifying widow(er)	$6,000
Head of household	$4,400
Single	$3,000
Married, filing separately*	$3,000

*If the taxpayer is married filing a separate return for federal income tax purposes and their spouse itemizes deductions, they are not entitled to a standard deduction.

If a taxpayer chooses to itemize deductions, the amount of state and local income taxes or general sales taxes deducted on his federal return must be added back to taxable income to the extent those taxes exceed the taxpayer’s North Carolina standard deduction.

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Aged or Blind Additional Deductions

An amount in addition to the basic standard deduction is allowed for a taxpayer who is 65 years old or older or blind (and/or whose spouse is 65 years old or older or blind, and a joint return is filed). The table below shows the dollar value of one additional amount for each filing status:

Filing Status	Dollar Value of One Additional Deduction
Single	$750
Married, filing jointly	$600
Married, filing separately	$600
Head of household	$750
Qualifying widow(er)	$600

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Tax Credits

There is a tax credit of $100 for each dependent child for which the taxpayer was allowed to claim a child tax credit on the federal return, provided that the taxpayer’s federal adjusted gross income is less than the threshold amount for his filing status, as follows:

Filing Status	Federal AGI
Married, filing jointly	$100,000
Head of household	$80,000
Single	$60,000
Married, filing separately	$50,000

A nonresident or part-year resident may claim the credit, but must reduce it by multiplying the credit by the same fraction used to determine the portion of total taxable income subject to North Carolina tax. The credit may not exceed the amount of tax for the taxable year reduced by the sum of all tax credits.

A person who is allowed a credit against federal income tax is also allowed a credit against North Carolina income tax for expenses incurred for child or dependent care. This credit is based on the taxpayer’s filing status and adjusted gross income. The credit ranges from 7% to 9% of employment-related expenses for a dependent who is seven years old or older. The credit ranges from 10% to 13% of employment-related expenses for a dependent, of any age, who is not physically or mentally capable of caring for himself or for a dependent who is less than 7 years old. The maximum amount of expenses for which a credit may be claimed for one dependent is $3,000; the maximum for more than one dependent is $6,000.

The credit for premiums paid on long-term care insurance is allowed only to a taxpayer whose adjusted gross income is less than the amount shown below for the taxpayer’s filing status.

Filing Status	Federal AGI
Married, filing jointly	$100,000
Qualifying Widow(er)	$100,000
Head of household	$80,000
Single	$60,000
Married, filing separately	$50,000

If the taxpayers’ adjusted gross income is less than the amount shown for their filing status, a tax credit is allowed for the qualifying premiums they paid during the tax year on a qualified long-term care insurance contract(s) (as defined in section 7702B of the Internal Revenue Code) that provides long-term insurance coverage for the taxpayer, their spouse, or a dependent for whom they are allowed to claim a personal exemption on the federal return. The credit is 15% of the premiums paid but may not exceed $350 for each qualified long-term care insurance contract for which a credit is claimed.

No credit is allowed for payments that are deducted from, or not included in, federal gross income for the tax year. For example, payments not included in federal gross income include premiums paid through an employer sponsored plan in which the payments are excluded from taxable wages (pre-taxed dollars). If the taxpayer claimed a deduction for medical expenses on Federal Schedule A, Line 4, or if they claimed a deduction for self-employed health insurance premiums on federal Form 1040, Line 29, they are not entitled to claim this credit. However, the credit is allowed for any premiums paid for long-term care insurance that are not deductible on the federal return because of the age limitations contained in section 213(d)(10) of the Code.

A nonresident or part-year resident is allowed a prorated credit based on the percentage of the taxpayer’s total income that is taxable for North Carolina income tax purposes.

There is a refundable Earned Income Tax Credit available to individuals but not to estates or trusts. This credit is 5% of the amount of the individual’s federal earned income tax credit. A nonresident or part-year resident must prorate this credit based on the portion of total income that is taxable in North Carolina.

A tax credit is allowed for small businesses that make contributions to the State Unemployment Insurance Fund during the tax year with respect to wages paid for employment in this State.  The credit is 25% of the amount of qualified contributions to the State Unemployment Insurance Fund.  A small business is defined as a business whose cumulative gross receipts from the business activity for the tax year do not exceed one million dollars ($1,000,000).  The credit may be claimed only against corporate and individual income taxes.  If the credit exceeds the amount of tax for the taxable year reduced by the sum of all credits allowable, the excess is refundable.  The credit applies to taxable years 2010 and 2011.

Other income tax credits are available. There is a tax credit for income taxes paid to another state or country on income taxable in North Carolina. There is a credit for adoption expenses, effective January 1, 2007 and expiring January 1, 2013. There are tax credits for the disabled, for property taxes paid on farm machinery, and a limited tax credit for charitable contributions made by taxpayers who claim the standard deduction. Tax credits are allowed for construction of handicapped dwelling units, certain energy-saving equipment, conservation tillage equipment, constructing poultry composting facilities, and credits for individuals who purchase the equity securities or subordinated debt of a qualified business directly from the business.

North Carolina law also allows several income tax credits intended to promote economic development which may be available to owners of businesses. Please see the section “TAX CREDITS FOR GROWING BUSINESSES (ARTICLE 3J)” for additional information about these credits.

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Tax Rates (for tax years beginning on or after January 1, 2008)

If you are:	and Taxable Income is:	the Tax Rate is:
Married, filing jointly	$0 - $21,250	6% of taxable income
	$21,251 - $100,000	$1,275 + 7% of taxable income over $21,250
	$100,001 or more	$6,787.50 + 7.75% of taxable income over $100,000
Qualifying widow(er)	$0 - $21,250	6% of taxable income
	$21,251 - $100,000	$1,275 + 7% of taxable income over $21,250
	$100,001 or more	$6,787.50 + 7.75% of taxable income over $100,000
Head of household	$0 - $17,000	6% of taxable income
	$17,001 - $80,000	$1,020 + 7% of taxable income over $17,000
	$80,001 or more	$5,430 + 7.75% of taxable income over $80,000
Single	0 - $12,750	6% of taxable income
	$12,751 - $60,000	$765 + 7% of taxable income over $12,750
	$60,001 or more	$4,072.50 + 7.75% of taxable income over $60,000
Married, filing separately	0 - $10,625	6% of taxable income
	$10,626 - $50,000	$637.50 + 7% of taxable income over $10,625
	$50,001 or more	$3,393.75 + 7.75% of taxable income over $50,000

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Other Taxes

Other State taxes the individual may be required to pay include: Occupational License Taxes, Sales and Use Tax, Piped Natural Gas Tax, White Goods Disposal Tax, Scrap Tire Disposal Tax, Highway Use Tax, Tobacco Products Tax, Alcoholic Beverage Taxes, Motor Fuel Taxes, and Estate Taxes. Additional local taxes that may be imposed include: Occupational License Taxes, Property Taxes, Real Estate Transfer Taxes, Sales and Use Tax, and Occupancy Tax.

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