North Carolina State Income Tax Breaks

When you prepare your North Carolina state income tax return you start with your taxable income from your federal tax return and then make certain additions and deductions to arrive at your North Carolina taxable income. If you use tax software to prepare your return you may be prompted to take all the deductions and credits you qualify for. But before sending in your return you should review it to ensure you have taken all tax benefits available to you. And if you prepare your tax return on paper, you need to know which deductions and credits you can claim.

State and local income tax refund

If you received a North Carolina state or local income tax refund that you had to include as income on your federal income tax return (because you had claimed the state or local income tax as an itemized deduction the prior year), you should report it as a deduction on your North Carolina income tax return on line 41 of Form D-400.

Retirement benefits

Social security and railroad retirement benefits are not subject to state income tax in North Carolina. If you had to include any portion of these benefits in your taxable income for federal income tax purposes, you should claim a deduction for this amount on line 43 of Form D-400.

If you received retirement benefits from the State of North Carolina, its local governments, or from the United States government, including the military, your benefits may be excluded from state tax in North Carolina. This exclusion applies to defined benefit plans if you had five or more years of creditable service as of August 12, 1989. It also applies to State 401(k) and 457 plans if you contributed or contracted to contribute to the plan prior to August 12, 1989. If you included these benefits in your federal tax return, you can deduct them on your North Carolina return, on line 44 of Form D-400.

On line 45 of Form D-400 you can claim a deduction for other retirement benefits, including pensions from a former employer, retirement benefits from a plan you establish for your business if you are self-employed, amounts you receive from a personal IRA or annuity, and long-term disability benefits you receive under the Disability Income Plan of North Carolina. If you received retirement benefits from the State of North Carolina, its local governments or the U.S. federal government and you did not have five years of service as of August 12, 1989, or if you received retirement benefits from another state or local government outside North Carolina, you can deduct up to $4,000. If both you and your spouse received retirement benefits, you could potentially deduct up to $8,000. If you received retirement benefits from a private plan, you can deduct up to $2,000 ($4,000 if both you and your spouse received benefits).

Severance wages

If you are laid off your job for no fault of your own, you can claim a deduction for up to $35,000 in severance pay. This severance pay does not include any compensation for past services, or payment for accumulated sick leave, vacation time, unused benefits, and bonuses based on job performance, or any payment for an agreement not to complete.

Tax benefits for education

If you contribute to North Carolina's National College Savings 529 Plan, you can deduct up to $2,500 a year ($5,000 if you are married filing jointly). If you claim the Hope or Lifetime Learning Credit on your federal tax return instead of taking the deduction for higher education expenses, you can claim a deduction of up to $4,000 for these expenses on your North Carolina return.

Volunteer firefighters

If you are a volunteer firefighter or rescue squad worker in North Carolina and you attended at least 36 hours of drills, training and meetings during the year, you can claim a $250 deduction.

Credits

If you paid state or foreign taxes on income earned or derived in a state other than North Carolina or in another country that you also had to include in your North Carolina tax return because you are a resident, you can claim a credit for the taxes actually paid in the other state or country. You would need to attach a copy of the tax return you filed in another state or country to your North Carolina tax return.

If you qualify for the federal earned income tax credit, you can claim a refundable earned income credit on your North Carolina return. The amount of the credit is 3.5% of the federal earned income credit.

You can claim a credit for child and dependent care expenses if you qualify for this credit on your federal return. For dependents age seven or older, the amount of the credit for North Carolina state tax purposes is 7 to 9% of the related expenses for federal tax purposes, depending on your filing status and federal adjusted gross income. For dependents under the age of seven and dependents physically or mentally incapable of caring for themselves the credit is from 10% to 13% of the related expenses.

You can claim a child tax credit of $100 on your North Carolina return for each dependent child who qualifies you for the federal child tax credit, provided your federal adjusted gross income is less than the maximum limits according to your filing status.

If you claimed the standard deduction on your federal tax return, you may still be able to claim a credit for charitable contributions on your North Carolina tax return. The maximum credit is 7% of the amount by which your charitable contributions exceed 2% of your federal adjusted gross income.

If you paid premiums for long-term health care contracts that cover you, your spouse, or a dependent for whom you can claim an exemption on your federal return, you can claim a credit on your North Carolina return for 15% of the premiums you paid, up to a maximum credit of $350 for each contract. This does not include medical insurance premiums for general health care, hospitalization or disability. Also, you cannot claim this credit if you claimed an itemized deduction for these medical expenses on your federal return or if you claimed a deduction for self-employed health insurance premiums.

If you adopt a child, you can claim an adoption tax credit on your North Carolina return. The credit is 50% of the adoption credit you claim on your federal return.

If you, your spouse, or a dependent is totally and permanently disabled, you can claim a credit on your North Carolina return for one-third of the amount of the credit on your federal tax return. You cannot claim any portion of the federal tax credit for being age 65 or older.

If you are in the farming business, you can claim a credit of up to $1,000 for the property taxes you paid on farm machinery or attachments and repair parts. For farmers, there are also credits for unharvested crops donated to a charitable organization, for the construction of poultry composting facilities, and for conservation tillage equipment.

Sources:
North Carolina Individual Income Tax Instructions for Form D-400 - North Carolina Department of Revenue