Category: North Carolina
North Carolina Subtractions from Income
Retirement Benefits Received by Vested Government Retirees (Bailey Settlement)
As a result of the North Carolina Supreme Court’s decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local governments or by United States government retirees (including military). The exclusion applies to retirement benefits received from certain defined benefit plans, such as the North Carolina Teachers’ and State Employees’ Retirement System, the North Carolina Local Governmental Employees’ Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees’ Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989. The exclusion also applies to retirement benefits received from the State’s §401(k) and §457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. The exclusion does not apply to local government §457 plans or to §403(b) annuity plans. Benefits from other State, local, and federal retirement plans may or may not be excluded depending on rulings in the Bailey case. The exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions.
A retiree entitled to exclude retirement benefits from North Carolina income tax should claim a deduction on Line 45 for the amount of excludable retirement benefits included in federal taxable income. Even if all your retirement is excludable under Bailey, you must still file a North Carolina return if you meet the minimum gross filing requirements. Important: If you qualify for this deduction, you do not qualify for the deduction for retirement benefits of up to $4,000 for the same federal, state, and local government retirement benefits.
Taxable Portion of Social Security and Railroad Retirement Benefits
Social security and railroad retirement benefits are not subject to State income tax. Enter any Title 2 social security benefits received under the Social Security Act and any Tier 1 or Tier 2 railroad retirement benefits received under the Railroad Retirement Act that were included in federal taxable income. Railroad Retirement Act benefits include railroad unemployment insurance benefits and railroad sickness benefits.
Other Retirement Benefits
You may deduct a portion of other retirement benefits included in federal taxable income. Retirement benefits are amounts paid by an employer to a former employee or to a beneficiary of a former employee under a written retirement plan established by the employer to provide payments to an employee or beneficiary after the employee ends employment with the employer where the right to receive the payments is based upon the employment relationship. For self-employed individuals, retirement benefits are amounts paid to an individual (or beneficiary) under a written retirement plan established by the individual to provide payments after self-employment ends.
Retirement benefits also include amounts received from an individual retirement account or from an individual retirement annuity (IRA) and long-term disability benefits received under the Disability Income Plan of North Carolina. Retirement benefits do not include short-term disability benefits from the Disability Income Plan of North Carolina or distributions paid to an employee from an employer’s retirement plan because of a change in the structure of a corporate employer.
Federal, State, and Local Government Retirement Benefits. (Important: The following instructions apply to you if you received retirement benefits as a former employee of the State of North Carolina or any of its local governments or as a former employee of the federal government and you did not have five years of service with the government as of August 12, 1989, or if you received retirement benefits as a former employee of any other state or from a local government §457 plan. Otherwise, see the Line 45 instructions.) If you received retirement benefits from one or more federal, state, or local government retirement plans, you may deduct the amount included in federal taxable income or $4,000, whichever is less. Married individuals filing a joint return where both received such retirement benefits may each deduct up to $4,000 for a potential deduction of $8,000.
Private Retirement Benefits. If you received retirement benefits from one or more private retirement plans other than federal, state, or local government retirement plans, you may deduct the amount included in federal taxable income or $2,000, whichever is less. Married individuals filing a joint return where both received such retirement benefits may each deduct up to $2,000 for a potential deduction of $4,000. The total retirement benefits deduction may not exceed $4,000 per taxpayer. For married couples filing a joint return where both spouses received retirement benefits, the deduction applies separately to each, so that the maximum deduction on a joint return is $8,000.
Contributions to NC College Savings Program
You may deduct up to $2,500 ($5,000 on a joint return) for contributions made during the taxable year to an account in the Parental Savings Trust Fund of the State Education Assistance Authority (North Carolina’s National College Savings Program - NC 529 Plan), regardless of your income level.
You may deduct up to $35,000 of any severance wages you received as a result of your permanent involuntary termination from employment through no fault of your own. The severance wages deducted as a result of the same termination may not exceed $35,000 for all taxable years in which the wages were received. “Stay on pay” does not qualify for the deduction. Severance wages do not include payments that represent compensation for past or future services. Compensation for past or future services includes payment for accumulated sick leave, vacation time, other unused benefits, bonuses based on job performance, or payments in consideration of any agreement not to compete.
Interest From United States Obligations
Enter the amount of interest received from notes, bonds, and other obligations of the United States (such as U.S. savings bonds, treasury notes and bills, etc.) or United States possessions.
Other Deductions From Your NC Taxable Income
- You may deduct $250 if you were an unpaid volunteer firefighter or an unpaid volunteer rescue squad worker who attended at least 36 hours of fire department drills and meetings or 36 hours of rescue squad training and meetings during 2011. An individual may not claim a deduction as both a volunteer firefighter and a volunteer rescue squad worker. In the case of a married couple filing a joint return, each spouse may qualify separately for the deduction.
- If you itemized your deductions and claimed the mortgage interest tax credit on your federal return because you participated in the mortgage credit certificate (MCC) program, you may deduct the amount shown on Line 3 of Federal Form 8396.
- If you claim the American Opportunity and Lifetime Learning tax credit on your federal return in lieu of the deduction for higher education expenses allowed under Section 222 of the Internal Revenue Code, you may claim a deduction of up to $4,000 for the Code Section 222 qualifying expenses.