North Carolina collects both income tax and sales tax, and the rates explore to most residents and purchases
Yes, North Carolina has a state income tax. The current rate is a flat 4.99 percent on all taxable income, regardless of how much you earn. This is one of the lowest state income tax rates in the country. North Carolina also charges a state sales tax of 4.75 percent, though many counties add a local sales tax on top of that, bringing the total to between 6.75 and 7.5 percent depending on where you live.
If you work in North Carolina or live there year-round, you will owe state income tax on wages, self-employment income, investment gains, and retirement distributions. The state does not tax Social Security benefits, but it does tax other retirement income including 401(k) withdrawals and IRA distributions. Sales tax applies to most goods and some services, though groceries and prescription medications are exempt.
Key Takeaways
- North Carolina's state income tax rate is 4.99 percent on all income levels, making it lower than many neighboring states.
- The state sales tax is 4.75 percent, but your total sales tax rate depends on your county's local add-on, which ranges from 2 to 2.75 percent.
- Social Security benefits are not taxed in North Carolina, but retirement account withdrawals and pensions are subject to income tax.
- Groceries, prescription drugs, and medical equipment are exempt from sales tax, but clothing, electronics, and restaurant meals are taxed.
How North Carolina's income tax brackets work
North Carolina uses a single flat tax rate rather than brackets. Every dollar of taxable income is taxed at 4.99 percent, whether you earn $20,000 or $200,000 per year. This means there is no jump to a higher rate at certain income thresholds the way some states structure their taxes.
The state does allow a standard deduction that reduces your taxable income before the 4.99 percent rate applies. For the 2024 tax year, the standard deduction is $10,750 for single filers and $21,500 for married couples filing jointly. If your income falls below these amounts, you may owe no state income tax at all. You can also claim itemized deductions instead of the standard deduction if they are larger.
North Carolina also offers a dependent exemption of $2,500 per person, which further reduces taxable income. These deductions and exemptions stack, so a family of four with one income earner can reduce taxable income significantly before the 4.99 percent rate kicks in.
Sales tax rates by county
The state sales tax of 4.75 percent is uniform across North Carolina, but most counties layer on a local sales tax that ranges from 2 to 2.75 percent. Your total sales tax depends on which county you are in when you make the purchase. Mecklenburg County (Charlotte) charges 7.25 percent total. Wake County (Raleigh) charges 7.25 percent. Some rural counties charge only 6.75 percent.
The local portion funds county schools, transportation, and other services. When you buy something in a store, the register shows the combined rate. Online purchases are more complicated: if you buy from an out-of-state seller, North Carolina now requires them to collect sales tax on your behalf if they have a physical presence in the state or meet certain sales thresholds. If they do not, you are technically responsible for paying "use tax" to North Carolina, though most individuals do not.
What is and is not taxed in North Carolina
Groceries and food for home consumption are exempt from sales tax. This includes bread, milk, vegetables, meat, and frozen dinners. Restaurant meals, prepared foods, and food eaten on premises are taxed. Prescription medications and over-the-counter drugs are exempt, as are medical devices like wheelchairs and diabetic supplies.
Clothing and shoes are taxed at the full sales tax rate. Electronics, furniture, appliances, and household goods are taxed. Gasoline is taxed at the pump as part of the fuel excise tax, separate from sales tax. Services like haircuts, car repairs, and plumbing are generally not subject to sales tax, though some specific services are taxed.
Utilities (electricity, water, gas) are taxed, but the rate is lower than the standard sales tax. Alcohol and tobacco carry additional excise taxes on top of sales tax. Lottery tickets are not subject to sales tax, but winnings are subject to income tax.
Retirement income and special tax rules
North Carolina does not tax Social Security benefits, which is a significant advantage for retirees. However, the state does tax distributions from 401(k) plans, traditional IRAs, and pension plans. If you receive a pension from a government employer (military, federal, state, or local), you may be able to exclude a portion of it from state income tax, depending on when you retired and your age.
Military retirement pay is partially exempt. Federal employees and their survivors can exclude a portion of their pension. Teachers and other state employees have different rules depending on when they began their service. These exclusions are complex, and it is worth reviewing your specific situation with a tax preparer or the North Carolina Department of Revenue.
If you move to North Carolina from another state and bring a pension or retirement account with you, you will owe North Carolina income tax on distributions once you become a resident. The state considers you a resident if you live there for more than 183 days in a year or if you establish a permanent home there.
How to file North Carolina state income tax
You file North Carolina state income tax using Form D-400, the North Carolina Individual Income Tax Return. You can file on paper by mailing it to the North Carolina Department of Revenue, or you can file electronically through the state's website or through a tax software provider. The important date is the same as the federal important date, typically April 15.
If you owe federal income tax, you almost certainly owe North Carolina income tax as well, since the state uses federal taxable income as its starting point. If you are self-employed, you will also owe North Carolina self-employment tax, which funds the state's workers' compensation and unemployment insurance programs.
The North Carolina Department of Revenue offers a free tax preparation program called Community Tax Centers for residents with low to moderate income. You can find a location near you on the department's website. If you use tax software, many providers offer free filing for North Carolina residents who meet income thresholds.
Comparing North Carolina's taxes to neighboring states
North Carolina's 4.99 percent income tax is lower than South Carolina (3 to 7 percent, depending on income), Virginia (2 to 5.75 percent), and Georgia (1 to 5.75 percent). However, Tennessee and Florida have no state income tax at all. North Carolina's sales tax of 4.75 percent plus local add-ons is comparable to South Carolina and Virginia but higher than some other states.
The overall tax burden depends on your income level and spending habits. A high earner in North Carolina pays more income tax than in Tennessee or Florida, but a retiree living on Social Security and a pension may pay less because Social Security is not taxed. Someone who spends heavily on taxable goods will feel the sales tax more than someone who buys mostly groceries and medications.
Frequently Asked Questions
Do I have to pay North Carolina income tax if I work there but live in another state?
Yes, if you work in North Carolina, you owe state income tax on the income you earn there, even if you live elsewhere. Your employer will withhold North Carolina tax from your paycheck. You may also owe income tax in your home state, depending on that state's rules. Some states offer a credit for taxes paid to other states to avoid double taxation.
Is there a state tax on retirement accounts like 401(k)s and IRAs?
North Carolina taxes distributions from 401(k)s, IRAs, and most pensions as regular income at the 4.99 percent rate. Social Security benefits are not taxed. Military pensions and some government employee pensions have partial exemptions, but the rules vary by employer and retirement date. Check with the North Carolina Department of Revenue about your specific pension.
What happens if I buy something online from out of state?
If the seller has a physical presence in North Carolina or meets certain sales thresholds, they must collect and send North Carolina sales tax. If they do not, you are technically responsible for paying use tax to the state, though enforcement is limited. Most major online retailers now collect North Carolina sales tax automatically.
Can I deduct property taxes or mortgage interest on my North Carolina state return?
North Carolina allows you to deduct property taxes and mortgage interest only if you itemize deductions instead of taking the standard deduction. For most filers, the standard deduction is larger, so itemizing does not save money. A tax preparer can calculate which option is better for your situation.
Do I owe North Carolina taxes if I just moved there?
You owe North Carolina income tax starting the day you become a resident. The state considers you a resident if you spend more than 183 days there in a calendar year or if you establish a permanent home there. You may owe taxes to both your old state and North Carolina for the year you move, depending on each state's rules.