North Carolina collects state income tax on wages, investment income, and retirement distributions

Yes, North Carolina has a state income tax. The state taxes wages, interest, dividends, capital gains, and distributions from retirement accounts. North Carolina's tax rate is a flat 4.99% on all taxable income, meaning everyone pays the same percentage regardless of how much they earn. This is different from the federal income tax system, which uses tax brackets that increase with income.

The state also collects sales tax (ranging from 6.25% to 7.5% depending on county), property tax on real estate, and various other taxes. But for most people, state income tax is the largest state tax bill they face each year.

Key Takeaways

  • North Carolina's state income tax rate is 4.99% on all taxable income, applied equally to everyone.
  • The state taxes wages, retirement account withdrawals, investment income, and most other sources of income the same way the federal government does.
  • You file North Carolina state taxes on Form D-400 if you lived in the state for any part of the tax year and had income to report.
  • Retirement account withdrawals from traditional IRAs, 401(k)s, and similar accounts are taxed as ordinary income by North Carolina.
  • Some types of income, such as Social Security benefits and certain military pensions, may be partially or fully excluded from North Carolina taxation.

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

North Carolina is one of nine states with a flat income tax rate, meaning the same percentage applies to all income levels. Other flat-tax states include Colorado (4.63%), Illinois (4.95%), Indiana (3.15%), Kentucky (5%), Massachusetts (5%), Michigan (4.25%), Pennsylvania (3.07%), and Utah (4.95%). The federal system, by contrast, uses progressive tax brackets where higher earners pay a higher percentage.

A flat rate means a person earning $30,000 pays the same 4.99% as someone earning $300,000. The higher earner pays more in total dollars, but not a higher percentage. This differs from states with progressive systems, where the percentage increases as income rises.

What income North Carolina taxes and what it does not

North Carolina taxes most forms of income at the same 4.99% rate. This includes W-2 wages from employment, self-employment income, interest from savings accounts and bonds, dividends from stocks, capital gains from selling investments, rental income, and distributions from retirement accounts like traditional IRAs and 401(k)s.

Some income is partially or fully excluded. Social Security benefits are not taxed by North Carolina, even though they may be taxed federally. Military retirement pay is also excluded from North Carolina taxation. Certain pension income may may have access to for an exclusion, though the rules depend on when you retired and what type of pension you receive. Long-term capital gains (profits from selling assets held more than one year) are taxed at the same 4.99% rate, not at a lower rate.

Income earned while you were not a North Carolina resident is generally not taxed by the state, even if you move there later. However, if you lived in North Carolina for any part of the tax year and had income, you must file a state return.

Filing requirements and important date for North Carolina state taxes

You must file a North Carolina state income tax return if you lived in the state for any part of the tax year and your income exceeds the filing threshold. The threshold changes yearly and depends on your age and filing status. For the 2023 tax year, the threshold was $12,200 for single filers under 65 and $15,200 for those 65 and older. For married couples filing jointly, it was $24,400 under 65 and $30,400 for those 65 and older.

North Carolina uses Form D-400 (Individual Income Tax Return) to file state taxes. The important date is the same as the federal important date: April 15 of the following year, or the next business day if April 15 falls on a weekend. If you file your federal return late or request an extension, your state return follows the same timeline.

You can file online through the North Carolina Department of Revenue website, by mail, or through a tax preparer. The state offers free filing options for lower-income residents through the IRS Free File program.

How retirement account withdrawals are taxed in North Carolina

Withdrawals from traditional IRAs, 401(k)s, 403(b)s, and similar pre-tax retirement accounts are taxed as ordinary income by North Carolina at the 4.99% rate. This means a $20,000 withdrawal from a traditional IRA results in $998 owed to North Carolina (plus federal tax). The state does not offer a lower rate or exclusion for retirement income, unlike some states that exclude pension or retirement distributions entirely.

Roth IRA withdrawals are not taxed by North Carolina, because the money was already taxed when you contributed it. Distributions from Roth accounts are considered tax-free income. However, if you convert a traditional IRA to a Roth (a "Roth conversion"), North Carolina taxes the converted amount as ordinary income in the year of conversion, just as the federal government does.

Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s at age 73 are also taxed as ordinary income. If you take an early withdrawal before age 59½ and owe a federal penalty, North Carolina does not add its own early withdrawal penalty, but the income itself is still taxable.

Tax withholding and estimated payments

If you receive a W-2 wage, your employer withholds North Carolina state income tax from each paycheck based on the W-4 form you complete. You can adjust your withholding by filing a new W-4 with your employer if you expect to owe more or less tax than usual.

If you have income that is not subject to withholding—such as self-employment income, rental income, or large investment gains—you may need to make quarterly estimated tax payments to North Carolina. Estimated payments are due April 15, June 15, September 15, and January 15. The state provides Form D-400ES (Estimated Income Tax for Individuals) to calculate what you owe.

If you under-withhold or fail to make estimated payments, North Carolina charges interest on the unpaid balance. The interest rate is set quarterly and is based on the federal rate plus a state adjustment.

Deductions and credits available under North Carolina law

North Carolina allows a standard deduction that reduces your taxable income before the 4.99% rate is applied. For the 2023 tax year, the standard deduction was $10,750 for single filers and $21,500 for married couples filing jointly. These amounts increase slightly each year for inflation. You can also itemize deductions if they exceed the standard deduction, though North Carolina's itemized deduction rules differ slightly from federal rules.

The state offers several tax credits that reduce the tax you owe dollar-for-dollar. These include the Earned Income Tax Credit (EITC) for lower-income workers, the Child and Dependent Care Credit, the Education Credit for higher education expenses, and the Retirement Income Credit for certain retirees. Credits are more valuable than deductions because they subtract directly from your tax bill rather than reducing your taxable income.

North Carolina also allows a deduction for contributions to a traditional IRA or SEP-IRA, similar to the federal deduction. Contributions to a Roth IRA are not deductible.

Frequently Asked Questions

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

If you live in North Carolina and work remotely, you owe North Carolina state income tax on your wages, even if your employer is based elsewhere. The state taxes income earned by residents, regardless of where the employer is located. If you work for a company in another state but live in North Carolina, you file a North Carolina return and may also need to file in the other state, depending on that state's rules.

Is Social Security taxed by North Carolina?

No. North Carolina does not tax Social Security benefits. Even if your federal return includes Social Security income, your North Carolina return excludes it. This applies to all Social Security recipients, regardless of age or income level.

What happens if I move to North Carolina partway through the year?

You must file a North Carolina return for the year you move to the state, reporting only the income you earned after you arrived. You also file a return in your previous state for the income earned before you moved. Both states use the same tax year (January 1 to December 31), so you report income on a calendar-year basis in both places.

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

No. North Carolina does not allow a deduction for federal income taxes paid. You can deduct state and local property taxes (up to $10,000 combined) on your federal return, but North Carolina state taxes are not deductible on your state return.

Does North Carolina tax military retirement pay?

No. Military retirement pay is fully excluded from North Carolina state income taxation. If you receive a pension from the U.S. military, you do not report it on your North Carolina return, even though you may report it federally.