North Carolina has certainly been busy making significant changes to state tax laws, and these took effect on Jan. 1, 2014. When these changes were signed into law last July, North Carolina had one of the highest income tax rates in the Southeastern United States. For individual taxpayers, income taxes changed from a multi-tiered system to a flat rate of 5.8 percent. Next year, beginning January 1, 2015, the flat tax rate drops again to 5.75 percent.
But that’s not all. For individual taxpayers, the new law also makes these modifications to adjusted gross income:
• Contributions to the North Carolina 529 college savings plan will no longer be deductible. Previously, a deduction of $2,500 per taxpayer was allowed, not to exceed $5,000 for a married couple filing jointly.
• The tax exemption of retirement benefits for federal and state employees under the so-called “Bailey Settlement” remains in effect. (This refers to a 1998 state Supreme Court decision.) But other retirement benefits not covered by the Bailey rule will no longer be deductible from taxable income. The details are complicated, so it’s a good idea to consult a tax professional to be sure if you’re covered or not.
• For 2012 and 2013, up to $50,000 of net business income (or up to $100,000 for a married couple filing jointly) could be excluded from North Carolina income tax. This exclusion will no longer be available, starting with the 2014 tax year.
• Federal tax depreciation deductions taken under the Internal Revenue Code’s Section 179 will now be limited to $25,000, with an investment limit of $125,000. In simple terms, this covers certain personal property used for business. Until this year, the deduction limit was $250,000, with a $800,000 investment limit. This provision also includes a complex rule that requires adding excess amounts back to federal income. It’s tricky enough that you should consult your tax expert about it rather than my trying to explain the details here.
• Previously, up to $35,000 of “severance pay” could be excluded from North Carolina tax. This exclusion is no longer available after 2013.
On the deduction side, here is what has changed:
• Standard deduction amounts will increase to $15,000 for married couples filing jointly, $12,000 for heads of households, and $7,500 for single taxpayers and married taxpayers filing separately.
• The deduction for personal exemptions has been repealed. Now, only the greater of the standard or itemized deduction can be subtracted from North Carolina adjusted gross income.
• Beginning Jan. 1, 2014, homeowners can’t deduct more than $20,000 total for mortgage interest and property taxes on a qualified residence.
On the tax credit side, here is what is no longer available after 2013:
• Credit for child care and certain employment-related expenses
• Credit for the disabled
• Credit for charitable contributions by those who don’t itemize deductions
• Credit for long-term care insurance
• Earned income tax credit
• Credit for adoption expenses
• Education expenses credit
• Credit for recycling oyster shells
• Credit for investing in business property and job creation under Article 3J
Here’s what “C” corporations can look forward to:
• For tax years beginning on or after Jan. 1, 2014, the tax rate will decrease from 6.9 percent to 6 percent. After Jan. 1, 2015, the rate drops to 5 percent. The tax rate will continue to decrease in 1-percent increments, to 4 percent in 2016 and 3 percent in 2017. These reductions depend on the state meeting its declared net General Fund tax revenue goals, which are based on projected economic growth.
“C” corporations will also lose the following credits after 2013:
• Credit for construction of dwelling units for handicapped persons
• Credit for certain real property donations
• Credit for conservation tillage equipment
• Credit for gleaned crop
• Credit for certain telephone subscriber line charges
• Credit for savings and loan supervisory fees
• Credit for construction of poultry composting facility
On the sales tax front, numerous changes include expansion of the sales tax to include service contracts and admission charges to an entertainment activity (concerts, theaters, museums, etc.,) an increase in the tax on manufactured homes from 2 percent to 4.75 percent, and on modular homes from 2.5 percent to 4.5 percent.
Who are the winners and losers? It is difficult to really say. It depends. Each person’s tax situation is different.
My goal is to give my clients and the public useful information, explained in plain English, about their finances and taxes. If you have a question you’d like me to answer in a future article, please let me know.
Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at [email protected] or 910-793-1181.
