North Carolina collects state income tax on wages, investment income, and business earnings

Yes, North Carolina has a state income tax. The state taxes income from wages, self-employment, interest, dividends, and capital gains. Unlike some states that tax only certain types of income, North Carolina applies its tax broadly to most forms of personal income.

North Carolina's income tax rate is a flat 4.99% for the 2024 tax year. This means everyone pays the same percentage regardless of how much they earn. The state does not use tax brackets the way the federal government does, where higher earners pay higher rates on portions of their income.

The state also taxes business income, retirement distributions, and certain other sources. If you work in North Carolina or live there, you will owe state income tax on money you earn, even if you also owe federal income tax on the same earnings.

Key Takeaways

  • North Carolina's state income tax rate is a flat 4.99% on most types of income, with no progressive tax brackets.
  • The tax applies to wages, self-employment income, investment earnings, and retirement distributions like IRA and 401(k) withdrawals.
  • You owe North Carolina income tax if you live in the state or work there, even if you also pay federal income tax.
  • North Carolina allows a standard deduction that reduces the income amount subject to tax, similar to the federal system.
  • Certain types of income, including Social Security benefits and some military pensions, may be partially or fully excluded from state taxation.

Who pays North Carolina state income tax

You owe North Carolina income tax if you are a resident of the state or if you earned income while working in North Carolina. Residency for tax purposes generally means you lived in the state for more than half the year or maintained a permanent home there. If you moved to North Carolina partway through the year, you may owe tax only on income earned after you became a resident.

Non-residents who work in North Carolina owe tax on income earned in the state, even if they live elsewhere. This applies to people who commute across state lines for work. If you fall into this category, you may be able to claim a credit on your home state's return to avoid paying tax twice on the same income.

Military members stationed in North Carolina may have different rules depending on whether they are stationed there or just passing through. The state generally does not tax military pay for non-residents on active duty, but the rules can be complex if you are married, have dependents, or own property in the state.

What income is taxed and what is not

North Carolina taxes wages, salaries, tips, and other compensation from employment. It also taxes self-employment income, rental income, and income from a business you own. Interest and dividend income are taxable, as are capital gains from selling stocks, real estate, or other investments.

Retirement account withdrawals are generally taxable. This includes distributions from traditional IRAs, 401(k)s, 403(b)s, and similar plans. However, North Carolina excludes certain types of retirement income from taxation. Military pensions are fully excluded from state income tax. Some government pensions and teacher retirement benefits may also be excluded, depending on when you retired and the specific plan.

Social Security benefits receive special treatment. North Carolina does not tax Social Security income for most residents. However, if your total income exceeds certain thresholds, a portion of your benefits may become taxable. The state also excludes certain types of income entirely, including workers' compensation, some disability benefits, and life insurance proceeds.

Standard deduction and how it reduces your tax

North Carolina allows a standard deduction that lowers the amount of income subject to state tax. For the 2024 tax year, the standard deduction varies by filing status and age. Single filers under 65 have one deduction amount, while married couples filing jointly have a higher amount. If you are 65 or older, you may claim an additional deduction.

The standard deduction works the same way as the federal deduction: you subtract it from your total income, and you pay tax only on what remains. If your income is below the standard deduction for your filing status, you may owe no state income tax at all. You can find the exact deduction amounts for your situation on the North Carolina Department of Revenue website or on your state tax forms.

You can also itemize deductions instead of taking the standard deduction if your may be able to access expenses are higher. Itemized deductions might include mortgage interest, property taxes, charitable contributions, and medical expenses. Most people benefit from the standard deduction, but it is worth comparing both options if you have significant deductible expenses.

How to file North Carolina state income tax

You file North Carolina state income tax using Form NC-40, the state's individual income tax return. You can file by mail or electronically through the North Carolina Department of Revenue's website. The state also accepts returns filed through federal tax software that includes state filing, and many of these services offer free filing if your income is below a certain threshold.

Your state return is separate from your federal return, even though you file both in the same year. You will need information from your federal return, such as your adjusted gross income, to complete the state form. If you have income from multiple sources — wages, self-employment, investments — you will report each on the appropriate line of the state return.

The filing important date for North Carolina is the same as the federal important date: April 15 of the following year, unless that date falls on a weekend or holiday. If you need more time, you can request an extension, which gives you until October 15 to file. An extension to file does not extend the time to pay taxes owed, so you should estimate your liability and pay by April 15 to avoid penalties and interest.

Tax credits and deductions available in North Carolina

North Carolina offers several tax credits that can reduce the amount of tax you owe. The Earned Income Tax Credit (EITC) is available to low- and moderate-income workers and is based on your federal EITC. The state credit is a percentage of the federal credit, so if you may have access to for the federal version, you likely may have access to for the state version as well.

The state also offers credits for child and dependent care expenses, education-related costs, and certain types of charitable contributions. If you paid taxes to another state on income you earned there, you may claim a credit for those taxes on your North Carolina return to avoid double taxation. The amount of the credit is limited to the lesser of what you paid to the other state or what you owe to North Carolina.

Deductions available in North Carolina include the standard deduction mentioned above, as well as itemized deductions if you choose to itemize. You can also deduct contributions to certain retirement accounts, such as traditional IRAs, which may reduce your taxable income. The state follows federal rules for most deductions, though there are some differences, so it is worth reviewing the state's tax guide to see what applies to your situation.

How North Carolina's tax rate compares to other states

North Carolina's flat 4.99% tax rate is lower than the top federal income tax rate of 37%, but it is higher than some neighboring states and lower than others. South Carolina has a top rate of 7%, while Tennessee and Florida have no state income tax at all. Virginia's top rate is 5.75%, making it slightly higher than North Carolina.

The flat-rate system in North Carolina differs from the progressive system used by most states, including neighboring Virginia and South Carolina. In those states, higher earners pay higher rates on portions of their income. A flat rate means a person earning $30,000 pays the same percentage as someone earning $300,000, though the person earning more pays more in total dollars.

When comparing states, it is important to look at the total tax burden, not just the income tax rate. Some states with no income tax have higher sales taxes or property taxes to make up the difference. North Carolina has a state sales tax of 4.75%, plus local sales taxes that vary by county, bringing the total sales tax to between 6.75% and 7.5% depending on where you live.

Frequently Asked Questions

Do I have to file a North Carolina state return if I only have a small amount of income?

You must file if your income exceeds the standard deduction for your filing status, even if it is only slightly above. If your income is below the standard deduction, you do not have to file. However, if taxes were withheld from your paychecks, filing may result in a refund, so it can be worth filing even if you are not required to.

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

You owe North Carolina income tax only on income earned while you were a resident. When you move, you become a part-year resident. You will report income earned before you moved on your North Carolina return and income earned after you moved on your new state's return. You may need to file returns in both states.

Are retirement distributions from a 401(k) or IRA taxed in North Carolina?

Yes, distributions from traditional IRAs and 401(k)s are taxed as ordinary income in North Carolina. However, military pensions are fully excluded, and some government and teacher pensions may be excluded depending on when you retired. Roth IRA distributions are not taxed if the account has been open for at least five years and you are 59½ or older.

Can I claim a credit if I paid income tax to another state?

Yes, North Carolina allows a credit for taxes paid to another state on income you earned there. The credit is limited to the lesser of the tax you paid to the other state or the tax you owe to North Carolina on that same income. You claim this credit on your North Carolina return.

Is North Carolina income tax withheld automatically from my paycheck?

Yes, if you work in North Carolina or for a North Carolina employer, your employer should withhold state income tax from your paycheck. You complete a W-4 form to tell your employer how much to withhold. If too much is withheld, you will receive a refund when you file your return; if too little is withheld, you will owe when you file.