NORTH CAROLINA Taxes

Retirement Income Taxes: Social Security is exempt.  At least $4,000 in exclusions for federal, state and local pensions (depending on dates and length of service); up to $2,000 exemption for qualified private pensions, including IRAs.  Out-of-state government pensions also qualify for the $4,000 exemption.  State  retirees with at least 5 years of creditable service as of August 12, 1989, will be permanently exempt from state income tax on their retired/retainer pay.  Be sure to investigate the Bailey decision partially explained below.  Taxable income also includes income derived from gaming in North Carolina.

Retired Military Pay: If an individual had five years of creditable service as of August 12, 1989, all military retired pay is exempt from taxes.  Otherwise, a deduction of up to $4,000 is allowed for military pay or survivor's benefits.

Military Disability Retired Pay: Retirees who entered the military before Sept. 24, 1975, and members receiving disability retirements based on combat injuries or who could receive disability payments from the VA are covered by laws giving disability broad exemption from federal income tax. Most military retired pay based on service-related disabilities also is free from federal income tax, but there is no guarantee of total protection.

VA Disability Dependency and Indemnity Compensation: VA benefits are not taxable because they generally are for disabilities and are not subject to federal or state taxes.

Military SBP/SSBP/RCSBP/RSFPP: Generally subject to state taxes for those states with income tax. Check with state department of revenue office.

Bailey Decision

As a result of the North Carolina Supreme Court's decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees of the State of North Carolina and its local government or by the United States government retirees (including military) for each retirement plan if the retiree has five or more years of creditable service as of August 12, 1989. The exclusion also applies to retirement benefits received from the State's 401 (k) and 457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. The exclusion does not apply to local government 457 plans, 403(b) annuity plans, or to retirement benefits paid to former teachers and state employees of other states and their political subdivisions. You can view the list of retirement plans in the North Carolina Department of Revenue Individual Income Tax Bulletins. A retiree entitled to exclude retirement benefits in arriving at North Carolina taxable income should claim a deduction on line 46 of the D-400 for the amount of excludable retirement benefits included in federal taxable income. A copy of Form 1099-R or W-2 received from the payer must be attached to the return to support the deduction.

 

Property Taxes:

All property, real and personal, is subject to taxation and is assessed based on 100% of appraised value.  Taxes are collected by cities and counties.  Under the homestead exemption, the greater of $25,000, or 50% of the appraised value of real property owned by a North Carolina resident and occupied by the owner as his or her permanent residence is excluded from the taxpayer's assessment, if the following requirements are met: (1) The owner is 65 years of age or older or is totally and permanently disabled.  (2) The disposable income of the owner did not exceed $25,000 for calendar year 2008. The 2009 limit is $25,600. The income eligibility limit is adjusted each year by the Social Security cost-of-living adjustment.  The disposable income limit amount includes all moneys received plus the disposable income of the applicant's spouse if they reside together.   Call 877-308-9103 for details.

The state also has a circuit breaker property tax deferment program.  Under this program, taxes for each year are limited to a percentage of the qualifying owner's income.  The qualifying owner must either be at least 65 years of age or be totally and permanently disabled.  For an owner whose income amount for the previous years does not exceed the income eligibility limit for the current year, which for the 2009 tax year is $25,600, the owner's taxes will be limited to 4% of the owner's income.  For an owner whose income exceeds the income eligibility limit, which for tax year 2009 is $38,400, the owner's taxes will be limited to 5% of the owner's income.

Inheritance and Estate Taxes:

There is no inheritance tax and the estate tax is related to federal estate tax collection.

Sales Tax: Effective September 1, 2009 the sales tax increases temporarily to 5.5%.  It is due to return to 4.5% on July 1, 2011.  Prescription drugs, medical equipment exempt, food subject to 2% county tax. Counties have the option of adding their own sales tax and/or a land transfer tax.

Gasoline Tax: 30.2 cents/gallon

Diesel Fuel Tax: 30.2 cents/gallon

Cigarette Tax: 35 cents/pack of 20

Personal Income Taxes:

Personal Exemptions: ** Single - $1,000; Married - $2,000; Dependents - 0

Standard Deduction: Single - $3,000; Married filing jointly - $6,000

Medical/Dental Deduction: Federal amount.  Income tax credit for premiums paid on long-term care insurance that covers the individual, a spouse or dependent.  Credit is equal to 15% of premium cost but may not exceed $350.

Federal Income Tax Deduction: None