As the previous year has come to an end, it is about that time when we start making mental notes about what needs to be prioritized in the approaching new year. With January now here, it’s only natural that you are starting to think about when to file your North Carolina income taxes and all that filing your income tax encompasses.
What is Income Tax in NC?
Income tax is the government-imposed tax on the income earned by individuals and businesses. In the state of North Carolina, there is a 4.99% individual tax rate and a 2.50% business tax rate. The taxes paid to federal and state governments help to fund public services, build infrastructure, fulfill government financial obligations, and provide the United States citizens with particular goods.
If you or your business earns income in North Carolina, it’s important to know what the different types of income taxes are.
- Individual Income Tax: personal income taxes levied by the federal government against an individual’s wages, salary, or other income from work performed.
- Business Income Tax: corporations, self-employed contractors, small businesses, and partnerships have taxes levied against their sales earnings by the federal government.
- State and Local Income Tax: taxes levied on your income by the state in which you live or operate a business.
Defining Taxable Income
It’s important to know the differences between taxable and non-taxable income in North Carolina. North Carolina income tax is levied against income earned through wages, salaries, tips, sales, self-employment, royalties, or any other monetary compensation for work performed.
If you earn money in NC from the following income sources, you must pay taxes to the IRS on that income:
- Income from work performed– wages, salary, self-employment earnings, and tips.
- Commission and bonus pay.
- Severance and unemployment benefits.
- Landlord earnings from rental properties.
- Profits earned from capital gains, stocks, dividends, bartering, and interest accrued.
- Digital assets and crypto-currencies earnings.
Do I Have to Pay Income Tax?
If you have earned money as an individual or as a business in the state, then you are required by the government to pay North Carolina income tax. Whether you are a resident, partial resident, or not a resident of NC but earned income in the state, you must pay taxes.
- Residents: people living in NC during the taxable year for more than 183 days.
- Partial residents: people who moved to or from NC during the tax year.
- Nonresidents: people who did not live in NC during any time of the tax year, but earned income in the State.
Although you may pay income taxes throughout the year that come directly out of your paycheck, you still need to file your income tax documents with federal and state governments. At the time of filing, once all income is reported along with credits, deductions, or other items, you will either have to pay additional taxes because you paid too little throughout the year, or you will receive a tax credit because you paid too much.
Preparing Your NC Income Taxes
Preparing your income taxes can be complicated– the more money you earn, the more assets you own, and the more deductions and credits to account for, the more complicated these calculations become. What information do you need to proceed to prepare to file your income taxes for the upcoming year? Let’s go through each of the categories of information as well as the types of documents you should compile to prepare for your income tax calculations.
The most obvious first step in preparing North Carolina income tax documents is to gather personal information.
We recommend knowing and/or finding documentation of:
- The social security numbers of you, your spouse, and anyone claimed as a dependant (children, elderly parents, etc.).
- Your Individual Taxpayer Identification Number (ITIN) if applicable.
- A copy of last year’s state and federal tax returns.
Your filing status is used to determine what your income tax filing requirements are as well as your eligibility for certain credits, deductions, or other factors. You need to know your intended filing status in order to determine your overall tax bracket.
Examples of filing status are:
- Single individual: unmarried tax filers not eligible for any other filing status.
- Married, filing jointly: married couples who are both residents of NC and filing their income taxes together, making them eligible for more tax benefits than those who file separately.
- Married, filing separately: married couples where one spouse lives in NC, but the other spouse lives or lived in a different state during the tax year may file separately; married couples where one spouse has significantly more medical expenses or itemized deductions than the other spouse.
- Head of Household: an unmarried taxpayer who has dependents are were responsible for more than half of their costs in the tax year.
- Qualified Widow(er): a living spouse who retains the tax benefits of “married, filing jointly” status for up to two years after the death of their spouse.
Gather any documents that show all sources of income, financial records for deductions and credits, or any other document that shows you or your business earned income in that tax year in order to prepare for your meeting with your tax consultant.
Income documents include:
- Employer-provided W-2 forms
- MISC-1099 forms for independent contractors
- Schedule K-1 docs for S-Corps, partnerships, and trusts
- Documents for tax deductions
- Receipts for expenses
- Proof of eligibility for tax credits
Tax deductions reduce your taxable income, thus lowering what you pay in taxes. While deductions are not matched dollar-for-dollar, they can still offer tax benefits. Itemized deductions have maximum amounts that can be deducted which may vary from state to state.
Having proper documentation for your deductions is important in the event you are subjected to an audit, but they are additionally helpful to know the exact amount for each itemized deduction. Whenever you can, save receipts for tax deductions and keep a record of any expenses you paid out of pocket related to your business or your work.
Here is a list of the types of deductions you can claim on your North Carolina income tax returns:
- Contributions to retirement accounts
- Tuition, interest, and fees related to education
- Medical bills
- Property taxes and mortgage interest
- Donations made to charitable organizations
- Classroom expenses made by educators
- Home office expenses for remote, WFH employees
In addition to deductions, you can receive tax credits which, like deductions, must be reported to the IRS. However, where deductions had capped limits to be claimed, credits have slightly more value due to being a dollar-for-dollar cut on the tax you owe.
Some popular income tax credits are issued for:
- Family and dependants
- Green-energy efforts
Filing Your NC Income Taxes
Our NC tax preparation professionals recommend using reputable tax calculation software or setting up an appointment with a trusted CPA in your area. Consulting with a certified public accountant is the best way to get the most out of your deductions as well as ensure that all your tax filing paperwork is filled out properly with the correct calculations.
Contact Our Raleigh Tax Prep CPAs Today
Do you need assistance preparing and filing your 2022 income taxes? Our North Carolina income tax professionals can take the stress and anxiety out of filing this year’s tax returns. Whether you are filing personal or business taxes our CPAs have over 20 years’ worth of knowledge and experience in working with federal and state income tax prep and consultation.
Call us today at (919) 872-0866 or fill out the form below to schedule a consultation with our Raleigh or Durham NC tax planning team.