Every year, new provisions in the North Carolina tax code take effect on January 1. This post highlights three new individual income tax changes.
1. Deduction of first $50,000 of “net business income.”
This new provision was enacted by the General Assembly in the hopes that this tax break will help generate job growth in North Carolina. Taxpayers may deduct the first $50,000 of net business income for the taxable year.
The term “business income” is not specifically defined, but does not include income that is considered passive income under the Internal Revenue Code. Because the statute is ambiguous as to the definition of “business income,” the North Carolina Department of Revenue will have to provide guidance as to the precise definition of the term. Presumably, “business income” will include income from partnerships, S corporations and sole proprietorships (Schedule C) that are active businesses for tax purposes.
2. The starting point for North Carolina individual income tax is now federal AGI.
Federal adjusted gross income (“AGI”) rather than federal taxable income, is now the starting point for computing North Carolina personal income tax. The North Carolina standard deduction and personal exemptions are then applied to determine North Carolina taxable income.
These changes are not intended to increase North Carolina taxable income or tax payable. Instead, they are designed to simplify the calculation of North Carolina personal income tax because taxpayers no longer will have to reduce the federal standard deduction and personal exemption amounts to conform to North Carolina law.
3. New tuition credit for children with special needs.
There is now a North Carolina state income tax credit of up to $6,000 per year for the amount of tuition paid by families who place eligible children with disabilities in private schools or public schools that charge tuition. The amount of the new North Carolina tax credit is equal to the amount of tuition and special education and related services expenses, up to $3,000 per semester ($6,000 per year). This credit is “nonrefundable,” which means that it cannot reduce a taxpayer’s tax due below zero.
Federal and state tax law is constantly changing due to legislative, judicial, and regulatory changes. We will continue to provide timely updates in future posts.