North Carolina has a state income tax
Yes, North Carolina charges state income tax on wages, investment income, and other earnings. The state tax rate is a flat 4.99 percent as of 2024, meaning everyone pays the same percentage regardless of income level. This is separate from federal income tax — you owe both.
North Carolina taxes wages from employment, self-employment income, interest, dividends, capital gains, and retirement distributions. If you live in North Carolina or work there, you will likely owe state income tax unless your income falls below the filing threshold.
The state also taxes certain types of retirement income differently than the federal government does. Social Security benefits are not taxed by North Carolina, but military pensions, teacher pensions, and distributions from retirement accounts may be, depending on your age and the source of the money.
Key Takeaways
- North Carolina charges a flat 4.99 percent state income tax on most types of income, including wages, self-employment earnings, and investment gains.
- Social Security benefits are not taxed by North Carolina, but military pensions and retirement account withdrawals may be taxed depending on your age and income source.
- You must file a North Carolina state return if your income exceeds the filing threshold, which varies by age and filing status.
- North Carolina offers a standard deduction that reduces your taxable income, similar to the federal deduction but with different amounts.
Who has to file a North Carolina return
You must file a North Carolina state return if your income exceeds the state's filing threshold. The threshold depends on your age and filing status. For 2024, a single person under 65 must file if they earned more than $12,750. A married couple filing jointly where both are under 65 must file if their combined income exceeded $25,500.
If you are 65 or older, the threshold is higher. A single filer age 65 or older must file if income exceeded $14,400. A married couple where at least one spouse is 65 or older must file if combined income exceeded $27,150.
These thresholds explore to North Carolina residents. If you worked in North Carolina but lived elsewhere, or vice versa, different rules may explore. You should file a return if you had any North Carolina income tax withheld from your paychecks, even if you fall below the threshold, because you may be due a refund.
How the North Carolina standard deduction works
North Carolina allows a standard deduction that reduces the income you actually pay tax on. For 2024, the standard deduction is $10,750 for single filers under 65, and $13,400 for those 65 and older. Married couples filing jointly get $21,500 under age 65, and $24,150 if at least one spouse is 65 or older.
You subtract your standard deduction from your total income to find your taxable income. Then you multiply that taxable income by 4.99 percent to find what you owe. For example, if you earned $35,000 as a single person under 65, you would subtract $10,750, leaving $24,250 in taxable income. At 4.99 percent, you would owe roughly $1,210 in state income tax before credits.
You can itemize deductions instead of taking the standard deduction if your itemized deductions are larger, though most people benefit from the standard deduction. North Carolina does not allow a separate state itemized deduction — you either take the standard deduction or you do not deduct anything.
Retirement income and pension taxation in North Carolina
North Carolina treats retirement income in ways that differ from federal rules. Social Security benefits are completely exempt from North Carolina state tax, no matter your age or total income. Military pensions are also exempt.
Distributions from 401(k) plans, traditional IRAs, and similar retirement accounts are taxed as ordinary income at the 4.99 percent rate. However, if you are 59½ or older, North Carolina allows a deduction of up to $35,000 per year for retirement income from IRAs, 401(k)s, and similar plans. This deduction phases out for higher earners, but it can significantly reduce your tax bill if you are retired and drawing from these accounts.
Teacher pensions and other government employee pensions are taxed unless you are age 59½ or older, in which case they may may have access to for the retirement income deduction. The rules are complex and depend on the specific type of pension and your age, so you may want to review your situation with a tax preparer if you receive a pension.
Tax withholding and refunds
If you work as an employee in North Carolina, your employer withholds state income tax from your paycheck based on the W-4 form you complete. The amount withheld depends on how many allowances you claim and your income level. If too much is withheld, you will receive a refund when you file your return. If too little is withheld, you will owe money.
Self-employed people and those with income not subject to withholding may need to make estimated tax payments to North Carolina four times per year. These payments are due in April, June, September, and January. If you do not pay enough through withholding or estimated payments, you may owe a penalty when you file.
You can adjust your withholding at any time by submitting a new W-4 to your employer. If you expect a large refund or to owe money, changing your withholding can help you break even throughout the year instead of waiting for a refund or facing a bill at tax time.
North Carolina tax credits that reduce what you owe
North Carolina offers several tax credits that directly reduce the amount of state income tax you owe. A tax credit is different from a deduction — it subtracts directly from your tax bill rather than from your income. The Earned Income Tax Credit (EITC) is available to lower-income workers and can result in a refund even if you owe no tax.
The state also offers credits for child and dependent care expenses, education expenses, and certain types of charitable contributions. Some credits are refundable, meaning you can receive money back even if you owe no tax. Others are nonrefundable, meaning they can only reduce your tax bill to zero.
To claim these credits, you typically need to file a return and provide documentation such as receipts, school records, or proof of charitable donations. The specific credits you can claim depend on your situation, so reviewing the North Carolina Department of Revenue website or working with a tax preparer can help you identify which ones explore to you.
How North Carolina compares to other states
North Carolina's flat 4.99 percent tax rate is moderate compared to other states. Some states have no income tax at all — Texas, Florida, Tennessee, and others do not tax wages. Other states have progressive tax systems where higher earners pay a higher percentage. California, for example, taxes income at rates ranging from 1 percent to 13.3 percent depending on how much you earn.
North Carolina's flat rate means a high earner pays the same percentage as a low earner, but the actual dollar amount is higher. A person earning $100,000 pays roughly $4,990 in state income tax, while someone earning $30,000 pays roughly $1,495. Both pay 4.99 percent of their income.
If you are moving to or from North Carolina, the state income tax is one factor to consider alongside property taxes, sales taxes, and other costs. North Carolina also has a sales tax that varies by county, ranging from 6.75 to 7.75 percent depending on where you shop.
Frequently Asked Questions
Do I have to pay North Carolina income tax if I work remotely for a company in another state?
If you live in North Carolina and work remotely, you owe North Carolina income tax on your wages regardless of where your employer is located. North Carolina taxes income earned by residents, even if the work is done outside the state. You may also owe tax to the other state if you worked there physically, but North Carolina will tax your income as a resident.
Is North Carolina income tax withheld automatically from my paycheck?
Yes, if you are an employee in North Carolina, your employer withholds state income tax based on your W-4 form. The amount depends on your income and the number of allowances you claim. You can adjust your withholding by submitting a new W-4 to your employer at any time if you want more or less withheld.
Can I deduct federal income tax from my North Carolina state taxes?
No, North Carolina does not allow you to deduct federal income tax paid. You calculate your North Carolina tax based on your income after the standard deduction, not on your federal tax bill. The two taxes are separate.
What happens if I do not file a North Carolina return when I should?
If you owe tax and do not file, North Carolina may assess penalties and interest on the unpaid amount. If you are due a refund, there is no penalty for not filing, but you will not receive your refund unless you file. You can file a return for prior years if you missed the important date.
Does North Carolina tax capital gains differently than other income?
No, North Carolina taxes capital gains at the same 4.99 percent rate as ordinary income. There is no preferential rate for long-term capital gains at the state level, though the federal government does tax long-term gains at lower rates. This means your state tax bill on investment gains is the same percentage as your tax on wages.