On July 17, 2013, North Carolina lawmakers came to an agreement on a state tax reform policy. The new policy, known as the Tax Simplification and Reduction Act of 2013, reduces income taxes for corporations and individuals, eliminates the estate taxes and broadens the scope of the sales and use tax. Unless otherwise noted, the provisions of the Act are effective January 1, 2014.
The highlights of the Act are as follows:
Individual Income Taxes
- Replaces current tax structure with a 5.8% flat tax rate beginning January 1, 2014 and a 5.75% flat tax rate for subsequent years
- Eliminates personal exemptions but increases some of the standard deductions (standard deduction for married filing jointly remains at $15,000):
|Filing Status||Standard Deduction|
|Head of Household||$12,000|
|Married, filing separately||7,500|
- Eliminates retirement income deduction, however, retains the tax exemption for social security income.
- Eliminates severance wages deduction and the $50,000 business income deduction.
- Sets the maximum itemized deduction for real estate taxes and mortgage interest at $20,000, but retains the unlimited deductibility of charitable contributions.
- Eliminates or changes many of the current tax credits including the child care credit, child tax credit (increases if you make less than $40,000), disability credit and education expenses credit. The long-term care insurance credit, refundable earned income tax credit and adoption expenses credit will all expire at the end of 2013.
Corporate Income Taxes
- Reduces the corporate income tax rate to 6% in 2014 and 5% in 2015
- Includes provisions to potentially reduce the corporate income tax rate to 4% in 2016 and 3% in 2017
- Maintains current franchise tax rate
Sales and Use Taxes
- Caps excise tax on motor fuel at 37.5 cents through June 30, 2015
- Expands the current sales tax rates to movies, live entertainment and museums
- Requires sales tax to be assessed on warranty agreements, maintenance agreements, repair contracts and other contracts for maintaining and repairing tangible personal property. Previously, these types of service contracts were exempt from sales tax.
- Eliminates the sales tax holidays in 2014 for school supplies, computers, clothing and Energy Star appliances
- Eliminates the North Carolina estate tax effective January 1, 2013.
Please do not hesitate to contact us with your questions or concerns about these changes and how they may affect you or your business.