Taxes 101: Planning for NC Income Tax

By Gerald Townsend, Financial Editor

This is the final installment in our year-long series on income taxes. You can find all previous articles on the boomnc.com website. This month we’re focusing on the North Carolina income tax.

When people talk about income taxes they usually focus on federal taxes, and rightly so; however, it would be an expensive mistake to forget about the NC income tax, as the top rate reaches 7.75%. Also, unlike the federal tax, NC does not treat qualified dividends or long-term capital gains any differently than ordinary income, so the amount of NC tax due can certainly surprise many people.

Some years ago NC simplified its personal tax calculation, using the federal taxable income as the starting point and then making adjustments in order to arrive at the NC taxable income. Let’s review the primary adjustments:

Additions to Federal Taxable Income

Personal Exemption & Standard Deduction—Unlike the federal return, NC has never increased the personal exemption or standard deduction—and the gap increases each year, resulting in ever-larger add-backs to NC taxable income.

Non-NC Bond Interest—Many taxpayers receive tax-exempt interest income, but if these bonds are not obligations of a NC political entity, their interest is taxed by NC.

Deductions from Federal Taxable Income

U.S. Government Interest—NC does not tax the interest you receive from U.S. savings bonds or treasury notes and bills. If you invest in these through a mutual fund, some or all of the interest may be exempt from NC tax.

Social Security—NC does not tax Social Security benefits.

Government Retirement Benefits—If you are a retiree of the State of NC, a NC local government, or the federal government and if you had five years of service as of 8/12/1989 you most likely qualify for your retirement pension to be totally tax-free for NC. In addition, distributions from the State 401(k) or 457 retirement plan may also be non-taxable.

Other Retirement Benefits—For other “public” retirement benefits the state allows a deduction of $4,000 ($8,000 maximum on a joint return). For “private” retirement plans of corporations or for IRA distributions, there is a $2,000 deduction ($4,000 maximum on a joint return).

Severance Pay—You can deduct up to $35,000 in severance wages you receive. Note that $35,000 is the cumulative amount that can be deducted for all tax years.

NC 529 Plan—If you contribute to the NC 529 College Savings Plan, you can deduct up to $2,500 ($5,000 on a joint return) each year. The account does not have to be yours, but could belong to your child, grandchild, etc.

Credits Against NC Tax

NC also has a number of credits that can reduce the NC income tax:

Other State Taxes—If your income is taxable to NC as well as being taxed in another state or foreign country, you can claim a credit on your NC return for these other taxes.

Child Credits—NC provides a credit for “child and dependent care expenses” and if you have children under 17, a “child tax credit.”

Charitable Contributions by Nonitemizers—Normally you have to itemize deductions in order to claim charitable contributions. However, NC allows taxpayers claiming the standard deduction to receive a credit for a limited amount of their charitable contributions.

Credit for Long-Term Care Premiums—If your adjusted gross income is less than $60,000 (single) or $100,000 (joint), NC provides a credit for qualifying premiums paid on long-term care insurance. The credit is 15% of the premiums paid, up to a $350 maximum per long-term care policy.

Adoption Credit—NC provides a credit equal to 50% of the federal adoption credit.

Click here for a complete listing of past Live Smart (financial) articles.

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