In July, Governor Pat McCroy signed the Tax Simplification and Reduction Act into law, effectively overhauling North Carolina’s state tax code. The new law addresses many topics such as sales tax, income taxation, and tax credits and deductions. As such, it will impact both individual taxpayers (including small business owners) and corporations. Some sections of the Act went into effect immediately after the law was ratified, while others will be phased in over the next 2-3 years.
Listed below are the more significant changes that are effective January 1, 2014. The changes are as follows:
- Individual Income Tax:
- The three-tiered tax rate system of 6%, 7%, and 7.75% will be replaced by a single flat rate of 5.8% for the 2014 tax year and 5.75% in 2015 and thereafter.
- The standard deduction will increase; however, personal exemptions are eliminated.
- Taxpayers will still be able to itemize deductions, but home mortgage interest and local property taxes on real estate will be limited to a combined $20,000.
- Retirement deductions from adjusted gross income ($4,000 for governmental retirees and $2,000 for private sector retirees) are eliminated by the Act. Social Security income and Bailey-vested state, local, and federal government retirement benefits remain exempt from state income taxes.
- The deduction for NC 529 Savings Plan (education savings plan) contributions is eliminated.
- The $50,000 deduction for individual business income is eliminated.
- Several tax credits are also eliminated. These include credits for child care, education expenses, and charitable contributions for taxpayers who do not itemize their deductions.
- The NC Child Tax Credit is increased to $125 for families with income below $40,000. For families with income between $40,000 and $100,000, the child tax credit remains at $100. There is no NC Child Tax Credit for families with income above $100,000.
- Corporate Income Tax:
- The corporate income tax rate will drop from 6.9% to 6% in 2014 and 5% in 2015, with further reductions to 4% in 2016 and 3% in 2017 if the state meets certain revenue targets for the 2014-2015 and 2015-2016 fiscal years.
- Sales Tax:
- The new law extends the state sales tax to certain service contracts and entertainment and entry tickets to certain attractions.
- Other Tax Changes:
- The North Carolina estate tax, historically designed to absorb the federal death tax credit (now repealed by federal law), is eliminated effective for estates of decedents dying on and after January 1, 2013.
For information on how this new law might impact you, please contact our office at 910.323.3100.