What’s New for 2013 North Carolina Tax Returns (Due in April 2014)?

What's New for 2013 TaxesThe North Carolina General Assembly enacted legislation that significantly overhauled the income tax laws in the state effective January 1, 2014.  Below is a highlight of the most significant changes to the income tax law impacting taxpayers in North Carolina.  Note that these laws will apply to the 2014 income tax returns due in 2015 with the exception of the repeal of education deductions which are effective with the 2013 returns due during 2014.

North Carolina Flat Tax

Perhaps the most drastic of all changes is the elimination of three personal income tax brackets (ranging from 6% to 7.75%) to a flat tax rate of 5.8% effective for 2014 and 5.75% effective in 2015.

Elimination of North Carolina Exemptions

In an attempt to simplify North Carolina tax law, many exemptions, deductions, and credits have been eliminated.  The most notable eliminations are as follows:

  • $50,000 exemption for small business owners
  • $4,000 deduction for government retirees (Bailey Settlement exclusions still apply)
  • $2,000 deduction for non-government retirees
  • $35,000 exemption for severance wages
  • Education expenses
  • Child care expenses
  • Earned Income Tax credit
  • Adoption expense credit
  • Long-term care insurance credit

Modification of North Carolina Standard Deductions on Tax Returns

To compensate for the loss of many deductions, the standard deductions that may be claimed on North Carolina tax returns increased as follows:

  • From $6,000 to $15,000 for married individuals filing jointly
  • From $4,400 to $12,000 for individuals filing using the Head of Household status
  • From $3,000 to $7,000 for individuals filing using the Single or Married Filing Separate status (if other spouse does not claim itemized deductions)

Changes to North Carolina Itemized Deductions on Tax Returns

New rules are in play for people who opt to itemize deductions in lieu of taking the standard deduction.  There is now a $20,000 maximum cap on the amount that can be claimed in total for mortgage interest and property taxes paid on real estate.  This deduction was previously unlimited for most people in the past.

Fortunately, North Carolina did not limit the amount of charitable contributions that may be claimed on a return for itemizers.

Repeal of the North Carolina Deduction for Education Expenses

Effective with the 2013 North Carolina tax returns filed during 2014, amounts related to the federal Tuition and Fees Deduction and amounts related to the American Opportunity or Lifetime Learning credits have been eliminated.  Therefore, amounts deducted on a federal return related to these education benefits will need to be adjusted on the North Carolina tax return to be included in taxable income.

Repeal of NC529 College Savings Plan Deduction

Contributions to North Carolina 529 college savings plans are no longer deductible.

Increase to North Carolina Child Tax Credit

The North Carolina child tax credit will increase from $100 to $125 per child for many families with income under $40,000.  However, the credit will remain at $100 per child for many as long as their adjusted gross income remains under the following thresholds:

  • $100,000 – Married Filing Jointly
  • $80,000 – Head of Household
  • $50,000 – Single or Married Filing Separately

Same-Sex Couples

Legally married same-sex couples must file their 2013 federal tax returns using either the filing status Married Filing Separate or Married Filing Jointly.  There is no longer any distinction in the federal tax law between same-sex couples and heterosexual couples.  However, same-sex couple must file their returns using the single status since North Carolina does not recognize the validity of same-sex marriages.  The change in the law means that tax returns will have to be prepared multiple times in any given year for each spouse  in order to file proper returns.

Related Articles

NC-4 EZ or NC-4: Changes to the North Carolina Employee’s Withholding Certificate Form

What’s New for 2013 Federal Tax Returns (Due in April 2014)

How to File Same-Sex Tax Returns in North Carolina

 

The information contained within this article is for general guidance only. As such, it should not be used as a substitute for consulting with professional accounting, tax, legal or other competent advisers. 

 

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