In North Carolina, you are expected to pay taxes if you are a resident or nonresident that receives income directly from the state. There are different types of taxes, such as sales tax, property tax, income tax, gas tax, and others. There is no more estate or inheritance tax in the state.
Prior to this time, this state had a progressive income tax system with rates ranging from 6% to 7.75%, however, this is no longer the case as the North Carolina Tax Simplification and Reduction Act of 2013 thoroughly modified the tax structure.
With this new law, a flat rate income tax was introduced and it helped increase the standard deduction for North Carolina taxpayers in all income levels. There is also a provision for tax deductions and credits to help minimize your tax liability.
Of course, while you go through this, you will learn about the income tax rate for North Carolina( both individual and corporate), property tax rate, reasons for the decline in tax rates, and much more.
What you Need to know about Income Tax Rate in North Carolina
The income tax rate in this state no longer runs a progressive income system. Currently, it is at a flat rate of 4.99% and it is known for a fact that there will be a yearly reduction in it. Below is an explanation of tax rates for previous years:
- For Tax Years 2019, 2020, and 2021 the North Carolina individual income tax rate is 5.25% (0.0525).
- For Tax Years 2017 and 2018, the North Carolina individual income tax rate is 5.499% (0.05499).
- For Tax Years 2015 and 2016, the North Carolina individual income tax rate is 5.75% (0.0575), etc
The new rates for future years are as follows:
- For Taxable Years beginning in 2023, the North Carolina individual income tax rate is 4.75%.
- For Taxable Years beginning in 2024, the North Carolina individual income tax rate is 4.6%.
- For Taxable Years beginning in 2025, the North Carolina individual income tax rate is 4.5%.
- For Taxable Years beginning in 2026, the North Carolina individual income tax rate is 4.25%.
- For Taxable Years beginning after 2026, the North Carolina individual income tax rate is 3.99%.
From the above information, it will be noted that as the year goes by, there is a reduction in the income tax rate in North Carolina hence leading to a flat rate system and this was because of the new law which was passed by North Carolina Tax Simplification and Reduction Act in 2013.
Also, North Carolina is one of eight states that charges a single, flat personal income tax rate to all taxpayers irrespective of their income or filing status
Individual income tax returns are due on April 15 but if it falls on a weekend or holiday, then it will be on the next business day.
The amount of tax paid can be minimized if taxpayers are eligible for tax credits. Being qualified for tax credits can help foster the appeal for a tax refund.
The state also offers tax deductions to minimize your tax liability, including a standard deduction or itemized deductions so all you have to do is to qualify.
How much is the Income Tax Rate for North Carolina?
The individual income tax rate for North Carolina is 4.99% for the taxable year 2022 and the rates are going down further in the coming years. It also has a 2.50 percent corporate income tax rate.
What is the Property Tax Rate in North Carolina?
The average effective property tax rate in the nation is 1.07% of the assessed value and in North Carolina, the average rate is 0.77%. North Carolina does not have a statewide property tax rate as the local taxing authorities determine the rates depending on the budget that they need for that year.
Extra property taxes can be added to your bill based on the municipality, the school district, fire departments, and other special taxing authorities available in the locality you reside. The North Carolina Department of Revenue simply oversees the valuation and taxation of property by the various taxing units around the state.
What Property Taxes Are Owed Each Year?
Property taxes are levied on three types of property: real property, personal property, and motor vehicles. Real property can be grouped into residential, commercial, agricultural, industrial, or special purposes and it refers to land with its buildings (if any).
Personal property refers to personal property that is mobile ( movable) and not static.
Registered motor vehicles do remit property taxes. You will receive a warning 60 days before it expires, and this is due on the 15th of the month following registration expiration. There’s a vehicle’s tax bill, which is part of its annual registration on the Tag and Tax Together program.
On the 1st of January in any taxable year, property taxes are remitted by the owner of the property. The property tax bill is given in July and is due on 1st day of September though it can be paid by January 6 without any penalty.
Are there any Homestead Exemptions in North Carolina?
The criteria to get the property tax exemptions is that you must use your home as your basic residence and live in the state for over two years.
There are two property exemptions in the state. First is the North Carolina older citizen exemption, which is an exemption with a value of at least $25,000 for seniors who must be at least 65 years old and must have lived in their homes for at least five years. Also, you must have an income of at least $31,000 to be eligible for this offer.
Next is for disabled veterans and it must be 100% related to their military service. They are qualified to get a property tax exemption of up to $45,000 for themselves or for their unmarried surviving spouse.
State Income Tax Rate North Carolina
The flat income tax rate is 4.99% of the state’s taxable income. That rate applies to taxable income – which is income minus all qualifying deductions and exemptions, as well as any contributions to a retirement plan.
Subsequently, the rate will be reduced in further years- 4.75% for 2023, 4.6% for 2024, 4.5% for 2025, 4.25% for 2026, and 3.99% for 2027 and thereafter. It applies to levels irrespective of your filing status.
Income Tax Deductions for North Carolina
There are deductions for taxable income in the state. This helps to reduce the amount of tax you have to pay. We should know that there are common deductions, such as home mortgage interest and real estate property taxes but you can also claim a deduction for repayment of the claim right income, qualified charitable contributions, and much more. In North Carolina, itemized deductions can vary from federal itemized deductions.
North Carolina provides a standard deduction for taxpayers. As of 2021, the issuance of standard deduction allowed taxpayers to reduce their taxable income by $10,750 for single filers, $21,500 for married filing jointly, and $16,125 for heads of households.
For one to be eligible for itemized deductions, the amount to be paid must be more than the standard deduction. Listed below are some case instances where itemized deductions are accepted in the state:
- Home mortgage interest
- Real estate property taxes
- Qualified charitable contributions
- Medical and dental expenses
- Real estate property taxes
North Carolina taxpayers can deduct up to $20,000 who are both liable for the mortgage, the deduction can only be taken by the spouse who actually paid them.
In addition to this, you are qualified to deduct charitable contributions of up to 60% of your adjusted gross income and you are also permitted to deduct medical and dental expenses that surpass 7.5% of your federal adjusted gross income.
North Carolina State Income Tax Credits
You can collect a credit if you received earnings from a source in another state or country and actually remitted tax on it, on your North Carolina state tax return to avoid paying double taxes.
Do I have to Pay Income Tax in North Carolina?
If you fall into any of the groups below, you are expected to file a North Carolina tax return if you receive income from the state. The groups are:
- Resident: This is the group of people who have lived in the state for more than 183 days during the taxable year.
- Part-Year Resident: This group refers to the people who became residents of North Carolina during the tax year or moved and became a resident of another state during the tax year.
- Nonresident: This refers to people who did not live in North Carolina at any time during the tax year but received earnings from North Carolina sources from where they reside.
There is no personal exemption for income tax rates in North Carolina for filers, spouses, or dependents, and social security benefits are not taxed by the state.
North Carolina Tax Breaks For Other Retirement Income
There is an exemption known as the “Bailey exemption.” This is an exemption for earnings received from federal government retirement plans, or special North Carolina state and local government retirement plans if the retiree had five or more years of commendable service as of August 12, 1989.
In the state, Military pensions are excluded from income tax if the retired person has served at least 20 years or is medically retired. Nonetheless, this exemption is not for severance pay received due to separation from the U.S. armed forces.
Railroad Retirement benefits are also exempted.
North Carolina set to Become the Newest 0% Corporate Income Tax Rate State
The corporate income tax rate for North Carolina is 2.5%. On November 18, 2021, a budget was signed into law by Governor Roy Cooper and this $25.9 billion budget consists of numerous provisions, including pay raises for teachers and state employees, funding for broadband expansion, increases to individual income tax deductions, and increases to a “rainy day” fund, among other important changes.
The main aim of the budget was for the gradual reduction in the corporate income tax rate in the state. Among other states that take corporate income tax in the country, North Carolina’s rate is the lowest. However, this tax rate will reduce gradually using the schedule below:
When it comes to the topic of corporate tax, North Carolina will be listed among the most competitive states for corporations in the United States because of the 0% rate it is about to achieve. The decrease in income taxes in the state has many benefits, like making North Carolina a more competitive business environment, and costs, such as a decrease in the number of tax collections to be repurposed everywhere in North Carolina.
Recently, several questions have been asked about how these benefits and costs trade off. We should remember that before the changes made on tax in the state in the early 2010s, North Carolina ranked 44th in the State Business Tax Climate Index.
During this time, North Carolina has seen GDP grow 17.7% from 2013 to 2019, which is more than 2% greater than non-North Carolina U.S. state’s growth during this same time period hence, there is evidence of the state’s improving business environment as having a positive influence on state growth.
To add to this, checking in 2021, North Carolina announced more new jobs than ever before – all showing that the business environment was already in good shape. Also before the tax changes were made, the state had good qualities such as a tech-ready workforce, world-class universities, quality of life, and a friendly business environment.
So if there’s anyone who wishes to argue against the reduction in corporate income tax in the state and how it will effect positive change, they must come up with lots of evidence.
Based on records, it is the tax on individual income that raises over half of all tax collections in North Carolina. Consequently, if North Carolina continues to bring in new businesses and their employees due to the state’s favorable business tax environment, then the lost tax collections from a 0% corporate income tax rate may not be noticed because of the increase in tax revenues from a huge number of individuals who are paying individual income taxes.
It is worth noting that most states like – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming do not impose corporate income taxes.
You’re expected to remit income tax in the state as long as you receive earnings directly from the state. Hence, it is important you learn about the rates, exemptions, deductions, and credits as this will enable you to know what you need to do and when to do it. You’re allowed to work and study in North Carolina as long as you can handle both.
It is also good to have an idea of the state’s property tax, its exemptions, and reduction too so when you come into the state, you will know how to go about getting a place to reside.
FAQs on Income Tax Rate for North Carolina
No, Its tax system ranked 11th overall on the 2022 State Business Tax Climate Index.
The state’s individual income tax rate was 4.99% for 2022 and it will reduce in subsequent years.
Undergraduate and graduate students with financial need are eligible to participate in work-study programs in North Carolina.