North Carolina Income Tax Rate Set to Drop in January

Taxpayers in North Carolina will see a much smaller individual income tax bill in 2014, thanks to multiple tax 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 withholding 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 deduction ($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 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 tax 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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