North Carolina does have 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 on most income, which means everyone pays the same percentage regardless of how much they earn. This is different from the federal income tax system, which uses tax brackets that increase with income.

North Carolina's income tax applies to residents and to people who work in the state but live elsewhere. If you work in North Carolina, you will owe state income tax even if you live in a neighboring state. The tax is withheld from paychecks by employers, similar to federal withholding, so most people do not pay a lump sum at tax time.

Key Takeaways

  • North Carolina's state income tax rate is a flat 4.99 percent on wages, interest, dividends, and most other income.
  • The tax applies to North Carolina residents and to anyone who works in the state, regardless of where they live.
  • Your employer withholds state income tax from your paycheck, just as they do federal tax.
  • Certain types of income, such as Social Security benefits and some retirement distributions, are exempt from North Carolina state tax.
  • You file North Carolina state taxes using Form D-400, which is due the same day as your federal return.

Who pays North Carolina state income tax

If you are a North Carolina resident, you owe state income tax on all income earned anywhere in the world. The state defines a resident as someone who lives in North Carolina for more than half the year or maintains a permanent home there. If you move to North Carolina mid-year, you are considered a resident for that entire tax year.

Non-residents who work in North Carolina must also pay state income tax on income earned within the state. This includes people who live in South Carolina, Virginia, Tennessee, or other neighboring states but cross the border for work. You do not have to be a resident to owe North Carolina income tax—only to earn money there.

What income is taxed in North Carolina

North Carolina taxes wages, salaries, bonuses, and tips at the 4.99 percent rate. It also taxes interest income from savings accounts and CDs, dividend income from stocks, capital gains from selling investments, and self-employment income. If you receive a 1099 form from a client or customer, that income is subject to North Carolina state tax.

Some types of income are exempt from North Carolina state tax. Social Security benefits are not taxed by the state. Military retirement pay is exempt. Certain distributions from retirement accounts, such as may have access to distributions from a Roth IRA, are also exempt. If you receive a pension from a government employer, part or all of it may be exempt depending on when you retired and how old you are.

Unemployment benefits are taxed by North Carolina, though you can request that your employer withhold state tax from those payments. Interest from U.S. Treasury bonds is exempt from state tax but not from federal tax.

How North Carolina withholds state income tax

Your employer withholds North Carolina state income tax from your paycheck based on the information you provide on Form W-4. When you start a job, you complete a W-4 that tells your employer how much to withhold. The more dependents or deductions you claim, the less your employer withholds. If you claim too few, you will have extra withheld and may receive a refund at tax time.

You can adjust your withholding at any time by submitting a new W-4 to your employer's payroll department. If you have multiple jobs, are married and both spouses work, or have significant investment income, you may need to adjust your withholding to avoid owing money when you file your return. The North Carolina Department of Revenue provides a withholding calculator on its website to help you estimate the correct amount.

Filing your North Carolina state tax return

North Carolina residents and non-residents who earned income in the state must file Form D-400, the state income tax return. This form is due on the same date as your federal return—typically April 15, though the important date may shift if April 15 falls on a weekend or holiday. If you file your federal return late using an extension, your North Carolina return is also extended.

You can file your North Carolina return by mail or electronically. The state offers free tax software through its website for people whose income is below a certain threshold. If you use a tax preparation service or accountant, they will typically file your state return along with your federal return for a single fee.

When you file, you report your total income, claim any deductions or credits you are may have access to to, and calculate the tax you owe or the refund you should receive. If your employer withheld too much, you will receive a refund. If your employer withheld too little, you will owe the difference.

Tax credits and deductions available in North Carolina

North Carolina offers several tax credits that can reduce the amount of state tax you owe. The Earned Income Tax Credit (EITC) is available to low- and moderate-income workers and is often worth more than the federal EITC alone. The Child and Dependent Care Credit helps offset the cost of childcare. The Education Credit applies to tuition and education expenses for yourself or your dependents.

The state also allows a standard deduction, which is the amount of income you can earn without owing tax. The standard deduction amount depends on your filing status and age. If you are 65 or older, you may may have access to for a higher standard deduction. Self-employed people can deduct half of their self-employment tax, just as they can on their federal return.

Frequently Asked Questions

Does North Carolina tax retirement income?

Social Security benefits are not taxed by North Carolina. Military retirement pay is exempt. Pensions from government employers may be partially or fully exempt depending on when you retired. Distributions from IRAs and 401(k)s are taxed as ordinary income unless they are may have access to Roth distributions.

What if I work in North Carolina but live in another state?

You owe North Carolina state income tax on the wages you earn in the state. You may also owe income tax to your home state, depending on that state's laws. Some states have reciprocal agreements that prevent you from being taxed twice, so check with your home state's tax authority.

Can I deduct federal income tax from my North Carolina return?

No, North Carolina does not allow you to deduct federal income tax paid. You can deduct state and local property taxes, state and local sales taxes (but not both), and mortgage interest, similar to the federal return.

What happens if I do not file a North Carolina tax return?

If you owe tax and do not file, the state can assess penalties and interest on the unpaid amount. If you are owed a refund but do not file, you can claim it for up to three years. If you believe you do not owe tax, you should still file to protect your refund.

Is there a penalty for paying my state taxes late?

Yes. If you owe tax and pay after the April 15 important date, North Carolina charges a failure-to-pay penalty and interest on the unpaid amount. The penalty is typically 0.5 percent per month. Filing an extension gives you extra time to file but does not extend the time to pay tax you owe.