NC Tax Rates: How They Impact Your Income and Filing Status

North Carolina’s tax rates determine how much of your income goes to the state each year. Whether you earn wages, run a business, or receive passive income, understanding these rates can help with financial planning and reducing tax liability. Changes in tax laws may also impact what you owe, making it important to stay informed.

Several factors influence your final tax bill, including deductions, credits, and how different types of income are treated. Where you live within the state could also mean additional local taxes beyond the standard rate.

Income Tax Rate Structure

North Carolina has a flat income tax system, meaning all taxpayers pay the same rate regardless of income. As of 2024, the state’s individual income tax rate is 4.5%, down from 4.75% in 2023. This rate applies to wages, salaries, business income, and other taxable earnings, making calculations simpler than in states with progressive tax brackets.

Unlike the federal system, which taxes higher incomes at higher rates, North Carolina’s flat tax applies equally to all earners. While this simplifies filing, it means lower-income residents pay the same percentage as wealthier individuals. The state plans to reduce the income tax rate to 3.99% by 2026 unless legislative changes alter the schedule.

For business owners operating as sole proprietorships, partnerships, or S corporations, income is taxed at the individual level rather than a separate corporate rate. This means business earnings are reported on personal tax returns and taxed at 4.5%. Unlike some states, North Carolina does not impose an additional tax on pass-through income, making it more favorable for small businesses.

Determining Taxable Income

Taxable income includes wages, self-employment earnings, rental income, capital gains, and other revenue sources. While North Carolina generally follows federal guidelines, certain adjustments are required.

Social Security benefits are not taxed, but 401(k) distributions and pensions are fully taxable. While federal tax law allows deductions for state and local tax payments, North Carolina does not. However, contributions to North Carolina’s 529 college savings plan are deductible at the state level.

For rental and investment income, North Carolina follows federal depreciation schedules but does not allow bonus depreciation, requiring adjustments when reporting business or real estate income. Capital gains are taxed as ordinary income, though federal exclusions, such as the home sale exclusion for primary residences, still apply.

Common Deductions and Credits

North Carolina offers deductions and credits that reduce taxable income or directly lower tax liability. Unlike the federal system, which provides a broad range of itemized deductions, the state focuses on specific adjustments.

A widely used deduction is for contributions to North Carolina’s 529 college savings plan, allowing taxpayers to deduct up to $2,500 annually ($5,000 for married couples filing jointly). Military retirees benefit from a full exemption on military retirement pay under the Bailey Settlement and subsequent legislative updates.

Tax credits provide additional savings. The state’s Child Tax Credit is available to households earning less than $100,000 ($120,000 for joint filers). There is also a credit for child care expenses, helping working parents offset daycare and preschool costs.

Filing Categories and Their Effects

Filing status affects taxable income, eligibility for deductions, and overall tax liability. North Carolina recognizes the same five filing statuses as the federal system: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Surviving Spouse.

Married couples typically benefit from filing jointly due to a higher standard deduction and access to more tax credits. Those filing separately face restrictions—if one spouse itemizes deductions, the other must as well. Additionally, certain credits, such as those for child care expenses, may be reduced or unavailable for separate filers.

Head of Household status offers a larger standard deduction and lower taxable income threshold for those supporting a dependent. However, strict qualifications apply, including maintaining a primary residence for a dependent for more than half the year.

Non-Wage Income Treatment

Non-wage income, such as investment earnings, rental income, and self-employment profits, is taxed at the same 4.5% rate but follows different reporting rules.

Dividends and interest income are fully taxable, regardless of whether they qualify for preferential federal rates. Capital gains from stocks, real estate, or other assets are taxed as ordinary income, though federal exclusions, such as the home sale exclusion, still apply.

Rental income follows federal guidelines, but North Carolina does not conform to all federal depreciation rules. Taxpayers must adjust their state returns for differences, particularly regarding bonus depreciation and Section 179 expensing. Self-employed individuals must also account for business deductions that may be treated differently at the state level. While North Carolina allows many common business expenses, it does not permit the federal qualified business income (QBI) deduction.

Local Surcharges and Rates

While North Carolina has a uniform state income tax, local governments impose additional taxes that affect residents’ overall tax burden. Property taxes, sales taxes, and county-level surcharges vary by location.

Property taxes are set at the county level, with rates differing based on municipal budgets. Wake and Mecklenburg counties have some of the highest property tax rates, while rural areas tend to have lower assessments. These taxes are based on periodically reassessed property values, meaning homeowners may see changes in their annual bills.

Sales tax rates also vary by county. The base state rate is 4.75%, but local governments add additional percentages, resulting in combined rates between 6.75% and 7.5%. Mecklenburg and Durham counties have higher rates due to transit and infrastructure surcharges. While income tax remains consistent statewide, these local variations mean the total tax burden differs depending on where a taxpayer lives.