by Leonora Bowman
Yea! North Carolina reduced the individual income tax rate beginning in 2014. That means that I will pay less tax to NC when I file my 2014 Form D-400, right? Like all tax questions the answer is “It depends.”
The following was taken from the North Carolina Department of Revenue’s Instructions for Individual Returns Form D-400:
What’s New :
Session Law 2013-316, House Bill 998, An Act to Simplify the North Carolina Tax Structure and to Reduce Individual and Business Tax Rates, was signed into law on July 23, 2013. The individual income tax rate was reduced, the N.C. standard deduction was increased, and many deductions and tax credits are no longer available for tax years beginning on or after January 1, 2014.
Change in tax rate.
The individual income tax rate is reduced to a flat 5.8 percent for tax years beginning on or after January 1, 2014 and to 5.75 percent for tax years beginning on or after January 1, 2015. N.C.
Standard Deduction or N.C. Itemized Deductions. You may continue to claim either the N.C. standard deduction or N.C. itemized deductions, however, both have changed. (See Page 8)
• N.C. standard deduction has increased for each filing status,
• No additional standard deduction is available for taxpayers age 65 or older, or blind.
• N.C. itemized deductions are no longer identical to federal itemized deductions and are subject to certain limitations.
N.C. Itemized Deductions.
• Qualified home mortgage interest and real estate property taxes are allowed as deductions. The sum of those deductions cannot exceed $20,000,
• Charitable contributions allowed as a deduction on the federal return are allowed without limitation.
Deduction for Other Retirement Benefits.
There are no longer deductions available to certain taxpayers for up to $4,000 for federal, state, or local government retirement benefits or up to $2,000 for private retirement benefits.
Deduction for Net Business Income that is Not Considered Passive Income.
There is no longer a deduction available to certain taxpayers for up to $50,000 of net business income included in federal adjusted gross income.
Deduction for Contributions to N.C. College Savings Program.
There is no longer a deduction for contributions made during the taxable year to an account in the Parental Savings Trust Fund of the State Education Assistance Authority (North Carolina’s National College Savings Program – N.C. 529 Plan).
N.C. Standard Deduction Amounts for Most Taxpayers:
Filing Status Standard Deduction
Single $ 7,500
Married Filing Jointly/Qualifying Widow(er) $15,000
Married Filing Separately $ 7,500
Head of Household $12,000
N.C. Personal Exemption Allowance.
You may no longer claim a personal exemption for yourself, your spouse, children, or any other qualifying dependents.
Credit for Children.
Amounts are increased from $100 to $125 per qualifying child for some taxpayers. If you are allowed a federal child tax credit under section 24 of the Code you are allowed a tax credit for each dependent child for whom a federal credit was allowed. The credit amount is based on your filing status and adjusted gross income, as calculated under the Code.
Child and Dependent Care Credit.
North Carolina no longer allows a tax credit for child and dependent care expenses.
Earned Income Tax Credit.
North Carolina no longer has a State earned income tax credit.
N.C. Education Endowment Fund:
Contribute to the N.C. Education Endowment Fund by making a contribution or designating some or all of your overpayment to the Fund.
Analysis of these changes:
So who will pay higher taxes? “It depends.” Families who could pay more are as follows:
Retirees can no longer deduct a portion of their retirement benefits.
Small business owners who were previously allowed to deduct the first $50,000 of self-employment income from their NC taxable income. For a married couple, who both have self-employment income that equals or exceeds $50,000, they will now be taxed on an additional $100,000 previously excluded. The tax on that is $5,800. Whether their NC tax will be higher or lower depends on their other taxable income and the other changes in deductions allowed.
Young families will no longer receive a child and dependent care credit or an earned income tax credit.
All wage earners in NC were required to resubmit withholding allowance forms to their employers in January, 2014 which would adjust the amount of state income tax withholdings typically taken from their pay. The intent by the state Department of Revenue was that the new allowances would better align with the law changes, however each individual taxpayer’s circumstances is different. NC taxpayers will have a better idea of how their state income tax withholdings match their actual income tax liability with the filing of their 2014 NC Individual Income Tax Returns. Should adjustments be necessary to increase state income tax withholdings in 2015, revised withholding allowance requests may be filed by employees with their employers at any time or alternatively quarterly estimated tax payments may be scheduled.
The Tax Team at Langdon & Company LLP will be happy to discuss these NC tax law changes with you. Please contact our office if you have additional questions.
Leonora “Lee” Bowman ([email protected]) is a Manager in our Accounting Services practice. She has over 25 years of experience in taxation and also specializes in multi-dimensional corporate accounting across various states.