North Carolina has a state income tax

Yes, North Carolina taxes your income. The state levies a flat income tax rate on wages, investment income, and other earnings. Unlike some states that have no income tax at all, North Carolina residents and anyone earning money within the state must file a state tax return if their income exceeds the filing threshold.

North Carolina's income tax rate has changed over time. As of 2024, the state income tax rate is a flat 4.99 percent on all taxable income. This rate applies equally to wages, dividends, interest, and most other forms of income. The rate is lower than it was in previous years — in 2021, it was 4.75 percent, and before that it was higher — but it remains a significant part of your overall tax burden.

Key Takeaways

  • North Carolina taxes all residents and income earners at a flat rate of 4.99 percent on taxable income.
  • You must file a North Carolina state tax return if your income exceeds the filing threshold, which varies by filing status and age.
  • North Carolina allows a standard deduction that reduces the amount of income subject to tax, similar to the federal standard deduction.
  • The state taxes wages, self-employment income, investment income, and retirement distributions, though some retirement income may be partially or fully excluded.
  • North Carolina residents pay both state and federal income tax unless they live in a bordering state with different tax rules.

How North Carolina's flat tax rate compares to other states

North Carolina's 4.99 percent flat rate means every dollar of taxable income is taxed at the same percentage, regardless of how much you earn. This differs from the federal income tax system, which uses tax brackets — higher earners pay a higher percentage on income above certain thresholds. Some states use brackets too, while others have no income tax at all.

States with no income tax include Florida, Texas, Tennessee, and Wyoming. States with income tax brackets include California, New York, and Virginia. North Carolina's flat rate sits between these approaches. The practical effect is that a high earner in North Carolina pays the same tax rate as a lower earner, but the dollar amount of tax owed is still higher because the rate applies to more income.

Filing requirements and income thresholds

You must file a North Carolina state tax return if your income exceeds a certain threshold. The threshold depends on your filing status and age. For the 2023 tax year, a single person under 65 must file if their gross income is at least $12,750. A married couple filing jointly must file if their combined gross income is at least $24,250. These thresholds increase slightly each year for inflation.

If you are 65 or older, the income threshold is higher. A single person 65 or older must file if gross income is at least $14,750. A married couple where at least one spouse is 65 or older must file if combined gross income is at least $26,250. These higher thresholds give older residents a larger income cushion before filing becomes required.

Even if your income falls below the filing threshold, you may still want to file if you had taxes withheld from your paychecks or if you are due a refund. Filing allows you to recover any overpayment.

What income is taxed in North Carolina

North Carolina taxes most forms of income. Wages and salaries are taxed at the full 4.99 percent rate. Self-employment income is also taxed. Interest and dividend income are taxed. Capital gains — profit from selling stocks, real estate, or other assets — are taxed as ordinary income at the same 4.99 percent rate.

Retirement income receives special treatment in some cases. Distributions from traditional IRAs and 401(k) plans are taxable. However, North Carolina allows a deduction for certain retirement income. Military pensions, federal pensions, and some other may have access to retirement income may be partially or fully excluded from taxation, depending on your age and the source of the income. Social Security benefits are not taxed by North Carolina.

Long-term capital gains — gains on assets held for more than one year — are taxed at the same rate as other income in North Carolina, unlike the federal system, which has preferential rates for long-term gains.

Standard deduction and tax credits available

North Carolina allows a standard deduction that reduces your taxable income before the 4.99 percent rate is applied. For the 2023 tax year, the standard deduction for a single filer is $10,750. For married filing jointly, it is $21,500. These amounts are set by the state and differ from the federal standard deduction, which is higher.

The state also offers tax credits that reduce the amount of tax you owe after calculating your tax liability. The Earned Income Tax Credit (EITC) is available to lower-income workers and is based on the federal EITC. North Carolina also offers credits for child and dependent care expenses, education expenses, and other specific situations. Credits are more valuable than deductions because they reduce your tax dollar-for-dollar rather than reducing your taxable income.

How to file your North Carolina state tax return

You file your North Carolina state tax return using Form D-400, the North Carolina Individual Income Tax Return. This form is filed separately from your federal return. You can file by mail, by phone, or electronically through the North Carolina Department of Revenue website. Electronic filing is faster and reduces errors.

If you use tax preparation software, most programs allow you to file both your federal and state returns in one session. The software guides you through the questions and calculates your liability. If you prepare your return by hand, you can read Form D-400 and instructions from the North Carolina Department of Revenue website.

The filing important date for North Carolina state taxes is the same as the federal important date: April 15 of the year following the tax year, unless that date falls on a weekend or holiday. If you cannot file by the important date, you can request an extension, which typically gives you until October 15 to file.

Tax withholding and estimated payments

If you are an employee, your employer withholds North Carolina state income tax from your paycheck based on the W-4 form you complete. The amount withheld depends on your filing status, the number of dependents you claim, and other factors. You can adjust your withholding at any time by submitting a new W-4 to your employer.

If you are self-employed or have income not subject to withholding, you may need to make estimated tax payments to North Carolina four times per year. These payments are due on April 15, June 15, September 15, and January 15. Estimated payments help you avoid owing a large amount when you file your return and may help you avoid penalties for underpayment.

Frequently Asked Questions

Does North Carolina tax retirement income differently than wages?

Most retirement income is taxed at the same 4.99 percent rate as wages. However, certain types of retirement income receive special treatment. Military pensions, federal pensions, and some other may have access to retirement income may be partially or fully excluded from taxation depending on your age and income level. Social Security is not taxed by North Carolina. Check the instructions for Form D-400 to see if your specific retirement income qualifies for an exclusion.

What is the difference between North Carolina's tax rate and the federal tax rate?

North Carolina's state tax rate is a flat 4.99 percent. The federal tax rate uses tax brackets, so the percentage you pay increases as your income increases, ranging from 10 percent to 37 percent depending on your income level and filing status. You pay both state and federal tax on the same income — they are separate taxes owed to different governments.

Can I deduct federal taxes paid from my North Carolina state taxes?

No. North Carolina does not allow a deduction for federal income taxes paid. However, you can deduct state and local taxes (SALT) on your federal return, up to $10,000 per year. This is a federal deduction, not a North Carolina deduction.

What happens if I move out of North Carolina during the year?

If you move out of North Carolina, you are a resident for the part of the year you lived there and a nonresident for the part you lived elsewhere. You must file a part-year resident return in North Carolina and report only the income you earned while living in the state. You may also owe taxes to the state where you moved, depending on that state's rules.

Do I have to pay North Carolina income tax if I work remotely for an out-of-state company?

Yes. If you are a North Carolina resident, you owe North Carolina income tax on all income you earn, regardless of where your employer is located or where you work. The state taxes residents on worldwide income. If you work remotely for an out-of-state company but live in North Carolina, that income is subject to North Carolina tax.