North Carolina enacted budget legislation with major income tax changes that include:
- creating, extending, and clarifying several income tax adjustments;
- phasing out the corporate income tax;
- reducing the personal income tax rate;
- updating the IRC conformity tie-in date for computing income tax liability from May 1, 2020 to April 1, 2021;
- increasing the standard and child deduction for personal income taxpayers;
- simplifying the corporation franchise tax.
Income tax withholding changes. Effective beginning November 18, 2021, North Carolina will no longer require a withholding reconciliation return within 30 days from employers that:
- terminate a business; or
- permanently cease to pay wages.
Instead, the withholding reconciliation return is due by:
- the last day of the month after end of the calendar quarter in which the employer terminates its business; or
- January 31 of the following year.
North Carolina will also require the assessment of estimated withholding tax against withholding agents that:
- fail to file a return and pay the withholding tax; or
- file a grossly inaccurate, false, or fraudulent return.
Corporate income tax phaseout. North Carolina is reducing the corporate income tax rate from 2.5% to:
- 2.25% for the 2025 tax year;
- 2% for the 2026 and 2027 tax years;
- 1% for the 2028 and 2029 tax years; and
- 0% for tax years after 2029.
Personal income tax rate and standard deduction. North Carolina personal income tax rates decrease from 5.25% to:
- 4.99% for the 2022 tax year;
- 4.75% for the 2023 tax year;
- 4.6% for the 2024 tax year;
- 4.5% for the 2025 tax year;
- 4.25% for the 2026 tax year; and
- 3.99% for tax years after 2026.
Effective for the tax years beginning after 2021, the standard deduction increases from:
- $21,500 to $25,500 for taxpayers with a filing status of married filing jointly or surviving spouse;
- $16,125 to $19,125 for taxpayers with a filing status of head of household; and
- $10,750 to $12,750 for taxpayers with a filing status of single or married filing separately.
Child Deduction. Individuals who can claim a federal child tax credit can claim a North Carolina deduction from federal adjusted gross income (AGI) for each dependent child. The child deduction ranges from $500 to $2,500 based on a taxpayer’s North Carolina AGI and filing status.
Effective for tax years beginning after 2021, the deduction range is $500 to $3,000. Taxpayers are not eligible for the deduction if the taxpayer's North Carolina AGI is more than:
- $140,000 for taxpayers with a filing status of married filing jointly or surviving spouse;
- $105,000 for taxpayers with a filing status of head of household; or
- $70,000 for taxpayers with a filing status of single or married filing separately.
Franchise tax. Taxpayers currently compute the North Carolina corporation franchise tax based on the larger of:
- net worth;
- actual investment in tangible property in North Carolina; or
- 55% of the appraised value of North Carolina tangible property.
Effective for tax years beginning after 2022, North Carolina eliminates the alternate property tax bases for computing the tax.
Federal expense deduction addback. Effective for tax years beginning after 2022, North Carolina corporate and personal income taxpayers must addback federal expense deductions related to income entirely excluded or exempted from state tax.
Business meal expense addback. IRC Sec. 274 limits the federal deduction for most business meal expenses to 50% of those expenses for tax years after 2017. There is an exception for business meals provided by restaurants in 2021 and 2022. Taxpayers can deduct 100% of those expenses.
Effective for the 2021 and 2022 tax years, North Carolina personal income taxpayers must addback the amount that exceeds the 50% limit.
Unemployment compensation addback. Federal legislation added an exclusion from federal gross income for 2020 unemployment compensation. Effective for the 2020 tax year, North Carolina personal income taxpayers must addback the amount excluded from the taxpayer's federal gross income. (Ch. 180 (S.B. 105), Laws 2021, effective July 1, 2021 and as noted).
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