After months of debate and numerous proposals with regard to tax reform in North Carolina, Governor Pat McCrory and North Carolina’s Legislature have reached a compromise. The Tax Simplification and Reduction Act of 2013 (HB 998) (the “Act”) generally reduces income taxes for both corporations and individuals and expands the scope of the sales and use tax to include certain services. The following summary describes key tax provisions of the Act:
How may the Act affect me?
The Act includes the following changes for individuals:
- Replaces the multi-tiered income tax regime with a flat tax. The Act reduces income tax for individuals from current rates (6 – 7.5%) to a flat tax of 5.8% in 2014. For subsequent years, the Act further reduces the rate to 5.75%.
- Eliminates the personal exemption, but increases the standard deduction from $3,000 to $7,500 for single taxpayers or married taxpayers filing as single; from $4,400 to $12,000 for single taxpayers filing as head of household; and from $6,000 to $15,000 for married taxpayers filing jointly.
- Maintains the exemption of social security income from state taxes.
- Eliminates the deduction of retirement income and severance wages.
- Caps the mortgage interest and property tax deduction on primary residences at $20,000.
- Maintains the unlimited deductibility of charitable contributions.
- Eliminates the $50,000 business income deduction beginning in 2014.
- Eliminates numerous credits (child care, disability and educational expenses), but extends the child tax credit and increases the value of such credit for individuals earning less than $40,000.
- Allows the long-term care insurance credit, earned income refundable tax credit and adoption expenses credit to sunset in 2014.
- Caps the gas tax until June 30, 2015 at 37.5 cents per gallon.
- Expands the sales tax to include “entertainment activities,” which include admissions charges for live performances, movies and museums.
- Imposes a sales tax on certain service contracts, specifically warranty agreements, maintenance agreements, repair contracts or other contracts to maintain or repair tangible personal property.
How may the Act affect my business?
The Act includes the following changes for businesses:
- Reduces the corporate tax rate from 6.9% to 6% in 2014 and 5% in 2015. In addition, if North Carolina meets certain revenue targets, the corporate tax rate may drop to 4% in 2016 and 3% in 2017.
- Maintains the current franchise tax rate ($1.50 per $1,000 of the largest of three bases: (i) capital stock, surplus and undivided profits, (ii) investment in tangible property in North Carolina; or (iii) appraised valuation of tangible property in North Carolina).
- Caps non-profit refund claims to $45 million in a given year.
- Extends the research and development credit to January 1, 2016, but allows other incentive tax credits to sunset as scheduled, including the credit for investment in renewable energy property (January 1, 2016).
How may the Act affect my personal estate planning?
The Act would repeal the estate tax, which is currently imposed at a maximum rate of 16%.
The Act contains many changes and implications for every taxpayer. The full text of the Act may be accessed here.