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North Carolina Income Tax Rate Set to Drop in January

2 min readBy: Liz Malm

Taxpayers in North Carolina will see a much smaller individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. bill in 2014, thanks to multiple taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reforms signed into law by Governor Pat McCrory in July of this year. Last week, the North Carolina Department of Revenue reminded employers that they’d need to have employees provide new individual income tax withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. documentation before tax changes go into effect on January 1, 2014.

Employees will see less withheld from their paychecks in the coming year. North Carolina will move from a system of three brackets ranging from 6.0 to 7.75 percent to a single rate of 5.8 percent on all income levels (this goes down to 5.75 percent in 2015). The state also eliminated the personal exemption ($2,500 for most single taxpayers), but will now offer taxpayers a higher standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. ($7,500 for singles).

Be sure to check out our coverage of the tax reform debate in North Carolina this year, starting with our book, North Carolina Tax Reform Options: A Guide to Fair, Simple, Pro-Growth Reform. In addition, we wrote a few Fiscal Facts (see Critics of North Carolina Tax Reform Miss the Point and North Carolina Considers Impressive Tax Reform Options). I took part in a lively debate on the future of Tar Heel tax reform, and my colleague Scott Drenkard testified before the NC Senate Finance Committee. We also had extensive blog coverage of the ongoing legislative debate.

On top of the reforms to the individual income tax, other North Carolina taxes will also see some big changes in 2014. The corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate will drop from 6.9 percent to 6 percent (this will be reduced to 5 percent in 2015 and could go even lower if revenue targets are met) and certain service contracts will be added to the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. base. For a full list of tax changes contained in HB 998, see here and here.

For our North Carolina state page, click here.

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