Goodbye Tax-Free Weekends, Hello Tax Code Changes
At 11:59 p.m. on Sunday August 4th, North Carolina’s state sales-tax-free weekend came to a close. If you stocked up on school supplies, clothing, electronics, and various other items, your total bill was a little lighter than usual. But we might be saying goodbye to tax-free holidays in the Old North State for the foreseeable future, due to recently passed tax legislation that calls for major changes to the state’s tax code. These tax code changes include revisions to individual income tax rules that will have an impact on many of us. Some of the major changes are listed below:
• Tax Brackets: For tax year 2013, the NC marginal income tax brackets for individual and married filers will remain at 6%, 7%, and 7.75%, depending on the amount of taxable income. In 2014, the three-tiered income tax rates are replaced with a flat individual income tax rate of 5.8%, which will drop to 5.75% in 2015.
• Social Security and retirement income: The new law does not change taxability of Social Security at the state level, as benefits will continue to be exempt from state income taxes. The law does, however, eliminate the $4,000 deduction for government retirement income and the $2,000 deduction for private retirement plan income. (Retirees with Bailey Act-protected accounts will continue to receive income from those accounts free of state income tax.)
• Personal Exemption: The personal exemption acted like a tax deduction reducing the taxpayer’s taxable income. The number of personal exemptions a taxpayer is allowed to claim is based on the number of dependents the tax payer supports. Starting in 2014, the personal exemption will be eliminated.
• Standard and Itemized Deductions: Typically, taxpayers take the higher of either the standard deduction or itemized deductions to further reduce their taxable income.
o The standard deduction will get a significant increase beginning in 2014, which will help to offset the loss of the personal exemptions. For 2013, a married couple filing jointly (MFJ) can take a standard deduction of $6,000. But in 2014, the standard deduction for the same couples (MFJ) jumps to $15,000. Single filers and those married filing separately will get a $7,500 standard deduction; individuals filing as head of household (HOH) will get a $12,000 standard deduction.
o Taxpayers that itemize their deductions can continue to claim unlimited charitable contributions, which are captured on the federal income tax return. Deductions for mortgage interest and property tax paid on a primary residence, however, are capped at $20,000 (MFJ), $16,000 (HOH), and $10,000 (single).
• North Carolina 529 Savings Plan Deduction: Beginning in 2014, contributions to the North Carolina 529 College Savings Plan will no longer be deductible from a person’s North Carolina state income tax. As we noted in an earlier blog post, this will make the NC 529 plan less attractive compared to plans offered by other states.
• Estate Tax: The law eliminates the North Carolina estate tax which is a state tax levied on an individual’s estate at death. The federal estate tax is still in effect.
• Sales Tax: Rates are unchanged at 6.75%. Movie/amusement tickets will now be taxed at the full sales tax rates; Energy Star and back-to-school tax holidays are eliminated; the state gas tax is capped at a rate of 37.5 cents/gallon until June, 2015.
Staying abreast of relevant federal and state legislative changes is one of the many things your team at Woodward Financial Advisors does to better serve our clients. If you have any questions about the upcoming tax changes or general financial questions, please contact us by visiting the Woodward Financial Advisors website or writing a question on our Contact Us page.