Information about some of the differences between North Carolina and federal income tax law as well a information on property taxes, sales and use taxes and inheritance, estate and gift taxes. We've also included information specific to obtaining a drivers license and license plates for your vehicles. Please note that this information is intended for use as a general reference only.
North Carolina and Federal Income Tax Differences
The calculation of North Carolina taxable income begins with federal taxable income. The federal amount is adjusted for a variety of modifications which can increase or decrease North Carolina taxable income.
Additions to Federal Taxable Income
- Interest on obligation of states other then North Carolina
- Any amount taxed by a separate tax under the IRS Code (i.e. lump sum distributions)
- State, local and foreign income tax deducted on federal return.
- Inflationary increases in the federal standard deduction and exemption.
- The excess of "bonus" depreciation allowed under federal tax law (described in 2002 and 03) over normal depreciation allowed under NC tax law.
- Federal estate tax that is deductible from federal gross income.
Deductions from Federal Taxable Income
- Interest on obligations of the United States.
- Social Security income taxable on federal returns.
- Refunds of state, local and foreign income taxes.
- All retirement benefits from federal retirement plans or North Carolina state or local government retirement plans for those vested with five or more years of service on August 12, 1989.
- Up to $4,000 in retirement benefits from one or more federal, state or local government retirement plans for those not qualifying for the full exclusion.
- Up to $2000 in retirement benefits from private retirement plans (including IRAs).
- Severance wages received from an employer as the result of depreciation that was an addition to federal taxable income in previous years.
Other Important Differences
- Tax rates - Taxable income on North Carolina returns are taxed at rates ranging from 6% to 8.25%. The top rate is charged on all income over $200,000 for married taxpayers filing jointly, income over $120,000 for single taxpayers and income over $160,000 for heads of household.
- Credit for child care - Employment-related expenses that qualify for the federal child care credit are also allowed as a North Carolina credit. This credit still ranges from $2,400 to $4,800, despite the fact that the federal range was increased in 2003.
- Credit for children - If you are entitled to claim a child tax credit on our federal return, you may claim a child tax credit of $100 on your 2004 state return.
- Credit for charitable contributions - For taxpayers who do not itemize, North Carolina allows a tax credit equal to 7% of the amount by which charitable contributions exceed 2% of federal adjusted gross income.
- Credit for long-term care insurance premiums - subject to some restrictions, taxpayers may claim a North Carolina credit equal to %15 of qualified long-term care insurance premiums for themselves, their spouse or their dependents.
- Estimated tax payments are required if our North Carolina income tax liability, after credits and tax withheld, is $1,000 or more.
- Estimated tax prepayments - Payments need to be 90% of the tax shown on the return of 100% of the prior year's tax (if a return was filed for the prior year) to avoid certain penalties.
Part-year residents are required to prorated their taxable income to determine the portion of their taxable income, after the above adjustments, that is subject to North Carolina income tax. In prorating their income, part year residents use a fraction in which the numerator is gross income from North Carolina sources as adjusted and the denominator is gross income from all sources. This fraction is applied to North Carolina taxable income to determine how much is taxable of the portion of the year you were a resident.
- If you are serving in the United States Armed Forces and your domicile (legal residence) is in North Carolina, you must pay North Carolina income tax and North Carolina income tax should be withheld from your military pay, regardless of where you are stationed.
- If you are a legal resident of another state who is stationed in North Carolina on military orders you will not be taxed on your military pay by North Carolina.
Moving expenses are deductible only when job related and when distance and length of employment tests are met. They are deductible under federal law as an adjustment to grow income. The types of deductible expenses area as follows:
- Traveling to the new location - 14 cents per mile for driving vehicle(s) or out-of-pocket costs; airfare or other transportation costs for the family or vehicles.
- Moving household goods and personal items.
Sale of Principal Residence
If you sell your principal residence and file a joint return, you may completely exclude $500,000 ($250,000 if filing single) of the gain from taxable income. Subject to exceptions, you mush have owned and occupied your home as your principal residence for at least two of the five years preceding the sale. You can use this exclusion once every two years.
North Carolina law provides for numerous credits that are available to offset your income tax liability. Many of these credits are subject to income limitations and/or dollar limitations. Please consult with Dixon Hughes to obtain all the details for any of the credits to which you may be entitled.
Commonly used credits
- Renewable energy property investment credit
- Credit for property donated of land conservation purposes.
- Credit for taxes paid to other states or countries.
- Credit for construction of dwelling units for the handicapped.
- Employment-related dependent care credit.
- Credit for disabled persons.
- Credit for rehabilitation of historic structures.
- Credit for dependent children.
William S. Lee credits for expansion of business in North Carolina
- Job creation credit.
- Machinery and equipment credit.
- Credit for research and development.
- Business property investment credit. (for investments prior to 2002)
Estate and Gift Taxes
North Carolina assess and estate tax for estates of decedents dying after Jan 1, 2002 that is equal to the maximum state death tax credit allowed on the federal estate tax return with regard to the phase-out of that credit. The North Carolina gift tax rules allow for the same annual exclusion as does federal law. Please note that a gift of twice that amount may be made but as in federal law, your spouse's consent to split the gift is required. No gift tax return is required of gifts of the annual exclusion or less per donee per year; however, splitting a gift and using spousal consent requires a timely filed return even though no tax would be due. Beyond this annual exclusion North Carolina allows an exemption of $100,000 for gifts made to Class A donees, which are described as lineal descendants, linear ancestors, stepchildren, adopted children, sons and daughter-in-laws. All gifts in excess of the exclusion and exemption are subject to gift tax at rates ranging from 1% to 17%.
Property Tax Listing
All residents are required to list business or professional personal property owned and located in North Carolina with the county where the property is located. Filing dates vary from county to county. Personal property to be listed includes machinery, equipment, furniture, computers, etc. Forms may be obtained by calling the county tax office. If you become a a resident of North Carolina on January 2 or later, you do not file a listing until the next January. Tax bills are usually mailed in mid-summer and cover the calendar year.
Sales and Use Tax
The state sales tax is generally imposed on the consumption or sale of tangible personal property at the rate of 6.5%. In Mecklenburg County, the rate is 7%.
Highway Use Tax
Motor vehicles are currently exempt from sales tax and instead are subject to highway use tax. This tax is assessed at the rate of 3% of the retail value for which a certificate of title is issued. When transferring title from another state, a maximum tax of $150 is applied at the time of transfer.
Newly arrived residents of North Carolina must obtain a driver's license and NC license plates within 60 days of establishing residency in the state. To obtain a driver's license, applicants must pass a written test, an eye test and a sign recognition test. The application fee ranges from $10 to $20 and licenses are valid for four to eight years, depending on age. When applying, you will need to to show your current out-of-state driver's license, social security card, verification of residence address (utility bill, etc.) and proof of liability insurance. If your out-of-state driver's license does not reflect your full name, you will need to t0 present another form of identification such as a birth certificate or passport. If your out-of-state license has expired or in certain other situations, you may be required to take a road test.
To obtain a license plate, you must show your driver's license, title, registration card from prior state and proof of insurance. For a leased vehicle, you will need to have power of attorney to sign for the leasing company and the leasing company will need to fax a copy of the title to the license agency. There is a $35.00 charge to transfer the title, a registration fee of $20.00 and a notary fee of $5.00 You'll also be responsible for a highway use tax, when the license plate is issued. Note that motor vehicles are also subject to property tax, which is billed separately. Regional Transportation Authority Tax ($5.00) applies to vehicles registered in Wake, Durham and Orange Counties. For additional information see: http://www.ncdot.org/dmv/moving/
Thank you for your interest and the privilege of serving you!
With our highest regard,
Wayne and Lynda Gomillion
"The Pinehurst Home Team"
The friendship and referrals of those we serve is the foundation of our success.