Category: North Carolina
North Carolina Subtractions from Income
State Income Tax Refund
Enter the amount of any state or local income tax refund included on Line 10 of your federal return, Form 1040.
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.
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.
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 10 for the amount of excludable retirement benefits included in federal adjusted gross 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.
Adjustment for Bonus Depreciation Added Back In 2011, 2012, 2013, 2014 and 2015
For tax years 2011, 2012, 2013, 2014, and 2015 an addition was required for 85% of the amount of bonus depreciation deducted on the federal return. Any amount added to federal taxable income or federal adjusted gross income on the 2011, 2012, 2013, 2014, and 2015 State returns may be deducted in five equal installments beginning with the 2012, 2013, 2014, 2015, and 2016 State returns, respectively. Therefore,
enter 20 percent of the bonus deprecation added back on the 2011, 2012, 2013, 2014, and 2015 State returns.
Adjustment for Section 179 Expense Added Back in Prior Years
For tax years 2011, 2012, 2013, 2014, and 2015, North Carolina did not conform to the increased federal expense deduction or increased investment limitations. An addition was required for 85% of the difference between the schedule 179 expense deduction using federal limitations and the deduction using NC limitations. Any amount added to federal taxable income or federal adjusted gross income on the 2011, 2012, 2013, 2014, and 2015 State returns may be deducted in five equal installments beginning with the 2012, 2013, 2014, 2015, and 2016 State returns, respectively. Therefore, enter 20 percent of the section 179 expense deduction added back on the 2011, 2012, 2013, 2014, and 2015 State returns.
Other Deductions From Your NC Taxable Income
The gain from the sale or disposition of North Carolina obligations issued before July 1, 1995, is deducted from adjusted gross income if the law under which the obligations were issued specifically exempts the gain.
The amount by which your basis of property for State purposes exceeds your basis of property for federal purposes must be deducted from your adjusted gross income in the year that you dispose of the property.
Income that meets both of the following requirements:
a. Is earned or received by an enrolled member of a federally recognized Indian tribe.
b. Is derived from activities on a federally recognized Indian reservation while the member resides on the reservation. Income from intangibles having a situs on the reservation and retirement income associated with activities on the reservation are considered income derived from activities on the reservation.
• The amount by which the deduction for an ordinary and necessary business expense was required to be reduced or was not allowed under the Code because you claimed a federal tax credit in lieu of a deduction.
• In the event of an actual or deemed transfer of an asset occurring on or after January 1, 2013, wherein the tax basis of the asset carries over from the transferor to the transferee for federal income tax purposes, the transferee must add any remaining bonus depreciation deductions allowed to the basis of the transferred asset and depreciate the adjusted basis over any remaining life of the asset. The transferor is not allowed any future bonus depreciation deductions.
• The amount of cancellation of indebtedness (COD) included in federal adjusted gross income that was previously deferred under section 108(i) (1) of the Internal Revenue Code in tax years 2009 or 2010.
Note: North Carolina did not conform to the federal provision that allowed certain taxpayers to elect to defer the reporting of income from the cancellation of indebtedness (COD) in tax years 2009 or 2010 and instead report the income ratably over a five-year period beginning in 2014.
For additional information please see the NC state instructions.