As you finalize your 2013 federal and state income tax returns you should be aware of the significant changes to North Carolina state taxes in 2014. In July 2013, the state legislature passed a material overhaul to the state tax code. A brief summary of the changes are included in the chart below:
| 2013 Law | Changes Effective Jan 1, 2014 | |
|---|---|---|
| Personal Income Tax Rate | Tax ranges from 6.0% to 7.75% | Reduce to flat rate of 5.8% in 2014 and 5.75% thereafter |
| Standard Deduction | 3,000 to $6,000 based on filing status | $7,500 to $15,000 based on filing status |
| Personal Exemptions | $2,000 to $2,500 per exemption based on income levels | Eliminated |
| Itemized Deductions | Federal Limits | Only Charitable Contributions (no limit), Mortgage Interest and Real Estate Taxes (combined cap of $20,000). |
| NC 529 Deduction for Contribution | $2,500 to $5,000 based on filing status | Eliminated |
| Small Business Exclusion | Deduction for first $50,000 of net business income ($100,000 for Married Filing Jointly) | No deduction for net business income |
| Corporate Tax Rate | 6.9% | 6.0% |
| Sales Tax | Expanded to include other services |
So who will pay more/less in taxes in 2014? It depends on your personal situation as the elimination of the personal exemptions will hurt many with large families and others will be impacted by the limit on itemized deductions. In addition, the elimination of the North Carolina 529 contribution deduction means there is no advantage of using the in-state 529 plan vs. another state. Regardless, the changes are forcing almost everyone to adjust their net pay in response to new income tax rate, changes to standard/itemized deductions and elimination of exemptions.
It is recommended you work with your tax preparer or financial planner to see how these tax changes impact your specific situation.
