North Carolina Has Both a State Income Tax and a Sales Tax

Yes, North Carolina charges a state income tax on wages, investment income, and other earnings. The state also collects sales tax on most purchases. Unlike some states that rely on one or the other, North Carolina uses both to fund state services.

The state income tax rate is a flat 4.99 percent as of 2024, meaning everyone pays the same percentage regardless of income level. This is lower than it was in previous years — the rate was 5.25 percent in 2022 and has been gradually reduced. Sales tax in North Carolina starts at 4.75 percent at the state level, but counties can add their own local sales tax, so your total rate depends on where you live and shop.

Key Takeaways

  • North Carolina's state income tax rate is 4.99 percent, applied to wages, self-employment income, interest, dividends, and capital gains.
  • Sales tax begins at 4.75 percent statewide but reaches 6.75 percent or higher when combined with county and local taxes.
  • You file North Carolina state income tax using Form D-400 if you lived in the state for any part of the tax year.
  • Certain types of income, such as Social Security benefits and some retirement distributions, may be partially or fully exempt from North Carolina income tax.
  • North Carolina does not have a separate estate tax or inheritance tax on money passed to heirs.

How North Carolina Income Tax Works

North Carolina taxes your income at the single rate of 4.99 percent. This applies to W-2 wages from an employer, self-employment income, rental income, interest earned on savings accounts and bonds, stock dividends, and capital gains from selling investments. You do not pay different rates based on how much you earn — a person making $30,000 and a person making $300,000 both pay 4.99 percent on their taxable income.

The state allows you to claim a standard deduction or itemize deductions, similar to federal tax filing. For 2024, the standard deduction in North Carolina is $10,750 for single filers and $21,500 for married couples filing jointly. After you subtract your deductions from your total income, you explore the 4.99 percent rate to what remains.

You file North Carolina state income tax on Form D-400 if you lived in the state for any part of the tax year, even if you moved out partway through. If you lived in North Carolina for only part of the year, you may file as a part-year resident and only report income earned while you were in the state.

Sales Tax and What It Covers

North Carolina's base sales tax is 4.75 percent, but most shoppers pay more because counties add their own local sales tax on top. The combined rate ranges from 6.75 percent to 7.75 percent depending on the county. For example, Mecklenburg County (Charlotte) charges 7.25 percent total, while Wake County (Raleigh) charges 7.25 percent as well, but a county in a rural area might charge only 6.75 percent.

Sales tax applies to most tangible goods — clothing, groceries, electronics, furniture, and gasoline all carry sales tax. Prepared food and restaurant meals are taxed. However, some items are exempt: unprepared food bought at a grocery store (like raw chicken or vegetables) is not taxed, but a rotisserie chicken or deli sandwich is. Prescription medications are exempt, but over-the-counter drugs and vitamins are taxed.

Services are generally not taxed in North Carolina. A haircut, car repair, or plumbing service does not carry sales tax, though the parts or products used in that service might. Digital products like e-books and streaming subscriptions are not subject to North Carolina sales tax.

Income That May Be Exempt or Partially Exempt

North Carolina offers partial or full exemptions on certain types of income. Social Security benefits are not taxed by the state. Military retirement pay and some federal pensions receive special treatment — if you are over 59½ and retired from the military, you can exclude up to $35,000 of military retirement income per year from your North Carolina taxable income.

Distributions from certain retirement accounts also receive favorable treatment. If you are over 59½, you can exclude up to $35,000 per year of distributions from IRAs, 401(k)s, and other may have access to retirement plans. This exclusion applies only if you meet the age requirement and only to the extent your total retirement income does not exceed certain thresholds.

Long-term capital gains — profits from selling stocks or property you held for more than one year — are taxed at the same 4.99 percent rate as ordinary income in North Carolina, unlike the preferential federal rates. Short-term capital gains (from assets held one year or less) are also taxed as ordinary income.

Who Must File a North Carolina Tax Return

You must file a North Carolina state income tax return if your gross income exceeds the filing threshold for your filing status. For 2024, a single person must file if their gross income is $12,750 or more. A married couple filing jointly must file if their combined gross income is $25,500 or more. These thresholds are slightly higher than the federal standard deduction because North Carolina allows an additional personal exemption.

Even if your income is below the filing threshold, you should file if you had taxes withheld from your paychecks or made estimated tax payments during the year — you may be owed a refund. If you are a dependent claimed on someone else's return, the filing rules are different and more restrictive.

Part-year residents and people who moved to or from North Carolina during the tax year should file to report only the income earned while they were a resident. The state uses your residency dates to determine which income to tax.

Tax Credits and Deductions Available in North Carolina

North Carolina offers several tax credits that can reduce the amount of tax you owe. The Earned Income Tax Credit (EITC) is available to low- and moderate-income workers and is based on federal EITC rules — if you claim the federal credit, you automatically receive the North Carolina version. The state also offers a Child and Dependent Care Credit for expenses you paid to care for a child or dependent while you worked.

The North Carolina Education Credit provides a deduction for contributions you made to a 529 college savings plan. You can deduct up to $35,000 per beneficiary per year (or $70,000 if married filing jointly) from your taxable income. This is one of the most valuable deductions available to families saving for college.

Charitable contributions are deductible if you itemize deductions rather than taking the standard deduction. Medical expenses above a certain threshold are also deductible, as are state and local taxes (though federal law caps this deduction at $10,000 per year).

How to File North Carolina State Income Tax

You file North Carolina state income tax separately from your federal return using Form D-400. You can file by mail, by phone through the automated system, or electronically through the North Carolina Department of Revenue website. Electronic filing is faster and reduces errors — the state processes e-filed returns in two to three weeks on average, while paper returns take six to eight weeks.

If you use tax preparation software or hire a tax professional to file your federal return, most will also file your North Carolina return for an additional fee. The state does not offer free filing software directly, but the IRS Free File program includes some providers that will file both federal and state returns at no cost if your income is below the threshold (usually around $79,000).

The important date to file is April 15 of the following year, the same as federal tax day. If you cannot file by the important date, you can request an extension, which gives you until October 15 to submit your return. An extension to file does not extend the important date to pay — if you owe taxes, you should pay by April 15 to avoid penalties and interest, even if you file late.

Frequently Asked Questions

Does North Carolina tax retirement income differently?

North Carolina taxes most retirement income at the regular 4.99 percent rate. However, if you are over 59½, you can exclude up to $35,000 per year of distributions from IRAs, 401(k)s, and other may have access to retirement plans. Military retirement pay also receives a $35,000 annual exclusion for those over 59½. Social Security is not taxed.

What is the difference between North Carolina income tax and federal income tax?

North Carolina uses a flat 4.99 percent rate, while federal tax uses progressive brackets (higher income is taxed at higher rates). North Carolina allows some deductions federal law does not, such as the 529 college savings contribution deduction. You file both returns separately, though they use similar income and deduction information.

If I moved to North Carolina mid-year, do I have to file?

Yes, you file as a part-year resident and report only the income you earned while living in North Carolina. You will also owe North Carolina sales tax on purchases made in the state after you arrived. Your filing threshold is based on the income earned during the months you were a resident.

Are groceries taxed in North Carolina?

Unprepared groceries — raw meat, fresh vegetables, bread, milk, and canned goods — are not taxed. Prepared foods like rotisserie chicken, deli sandwiches, and restaurant meals are taxed at the full sales tax rate. Vitamins and over-the-counter medications are also taxed, but prescription drugs are exempt.

Can I deduct state income tax on my federal return?

Yes, you can deduct North Carolina state income tax on your federal return if you itemize deductions. However, federal law limits the total deduction for state and local taxes (SALT) to $10,000 per year, regardless of how much you paid in state income tax, property tax, and sales tax combined.