2021 brought many tax changes to North Carolina with the passage of the First in Freedom Budget, and in the end, everyone will see a bit more in their wallets. There are multiple tax changes that may affect you beginning in the new year. See below for personal, business, and other tax changes to expect.
- Your personal income taxes will be decreased from 5.25% of your income to 4.99%. In future years, savings will grow as the personal income tax decreases to 3.99%.
- The standard deduction in the personal income tax code will increase, providing targeted relief to benefit low-income households most. The deduction will increase from $21,500 to $25,500 for joint filers; $10,750 to $12,750 for single filers; $16,125 to $19,125 for heads of household; and $10,750 to $12,750 for married families, filing separately. This means that the median earner making $50,653 (filing as a single) will only pay taxes on 75% of their income.
- The child tax credit deduction will increase by $500 per child. New deductions will range from $3,000 for lower-income earners filing jointly to $500 for those making between $120,000 and $140,000. Joint filers with incomes above $140,000 receive no deduction.
- Military personnel will no longer pay taxes on their retirement benefits (retroactively to January 2021). North Carolina is home to the fifth-largest share of military personnel in the nation. This change will save North Carolina veterans $30 million.
- Beginning in January 2023, North Carolina’s franchise tax base will be simplified for taxes reported in 2022. The new law will reduce the liability for businesses by requiring businesses to calculate their tax liability under one base instead of three. In prior years, North Carolina’s franchise tax was levied on the largest of these three options: the company’s net worth, 55% of the real property in the state, and the business’s total tangible property investment in the state. Businesses will only calculate their franchise tax on the net worth with the new law. Although the franchise tax is still harmful and redundant, this action reduces the burden on businesses.
- Businesses that received a Paycheck Protection Program (PPP) loan will no longer face significant taxes on the loan, thus coupling with the tax treatment at the federal level. With this change, North Carolina businesses may deduct expenses covered by the PPP loans from their taxes. Refunds will be issued to those with PPP expenses on their 2020 federal returns.
- Certain pass-through businesses will be allowed to elect to pay taxes at the entity level, thus reducing the impact of the federal SALT cap. Using the business owner’s tax return, the business may pay the individual state income and thereby reduce the taxes paid, in addition to avoiding the SALT deduction cap at the federal level.
- Cigars, especially handmade or more expensive ones, will likely see their prices reduced under the new budget bill that creates a tax cap of 30 cents per cigar, whether sold in person or online. The bill also requires out-of-state retailers to pay taxes on sales to North Carolina stores, likely resulting in a price increase to consumers for cigars bought online and shipped to North Carolina. These changes are effective in July 2022.
- Income-producing historic structures have expanded and extended credits under the new budget bill. These credits were previously set to expire in 2024. They will now sunset in 2030.
- Property set apart for commercial burial services is exempt from taxation. Cemeteries, for example, are exempt from property taxes, effective in July of 2022. Previously, such properties were designated as a special class and taxed accordingly.