What’s New for 2016 North Carolina Tax Returns (Due in April 2017)?

The 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 that continue to impact taxpayers in North Carolina for 2016.North Carolina Tax Law Changes

Inevitably, 2017 is likely to present some tax planning challenges as is typical when there is a change in political administrations.  Hopefully, any changes will simplify our client’s understanding of what is expected from them while reducing tax compliance burdens.  We will continue to focus on delivering quality and proactive services regardless of how volatile tomorrow’s tax law changes may be.

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.  The 2016 flat tax rate is 5.75%.

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 exemptionfor 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 for 2016:

  • From $6,000to $15,000 for married individuals filing jointly
  • From $4,400to $12,000 for individuals filing using the Head of Household status
  • From $3,000to $7,500 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.

In addition, the itemization of medical expenses deducted on a taxpayer’s federal return are deductible as well as charitable contributions.

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

North Carolina recognizes the marriages of same-sex couples legally performed both inside and outside of North Carolina. As such, same-sex married couples must file Federal and North Carolina returns using either the Married Filing Jointly or Married Filing Separately filing status.  Couples married prior to October 24, 2014, may be eligible to claim additional refund money for the past 2 years by filing amended tax returns.

Related Articles

What’s New for 2016 Federal Tax Returns (Due in April 2017)

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

Simply Taxes, LLC is a local year-round tax preparation firm with an office located in North Raleigh. Our Raleigh accountants are ready to work one-on-one with you to help optimize your tax deductions and to resolve any other tax issues in a professional manner.

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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