2018 Personal Taxes Law Changes

The 2016 General Assembly and the 2017 General Assembly amended this subdivision to increase the standard deduction amount for each filing status as reflected in the tables below:

For taxable years beginning on or after January 1, 2017, and before January 1, 2019, the standard deduction amount for each filing status is as follows:

For taxable years beginning on or after January 1, 2019, the standard deduction amount for each filing status is as follows:

(The 2016 General Assembly amendment effective for taxable years beginning on or after January 1, 2017 and before January 1, 2019; HB 1030, s. 38.1(b), S.L. 2016-94. The 2017 General Assembly amendment effective for taxable years beginning on or after January 1, 2019; SB 257, s. 38.2(a), S.L. 2017-57.)

The Bipartisan Budget Act of 2018, enacted by Congress in February 2018, extended through tax year 2017 the federal provision that allows an individual an itemized deduction for mortgage insurance premiums paid or accrued by treating those premiums as qualified residence interest. North Carolina has historically decoupled from this provision of the Internal Revenue Code. Sub-subdivision (b) was amended to extend the provision originally enacted effective for taxable years beginning on or after January 1, 2014, that caused North Carolina to decouple from the Internal Revenue Code with respect to mortgage insurance premiums. As amended, an individual is not allowed a North Carolina itemized deduction for mortgage insurance premiums paid during the year and treated as qualified residence interest under the Code for tax year 2017.

(Effective June 12, 2018; SB 99, s. 38.1(c), S.L. 2018-5.)

The 2017 General Assembly amended G.S. 105-153.5 to add new subsection (a1) which allows a taxpayer a deduction for each dependent child for whom the taxpayer is allowed a federal child tax credit under section 24 of the Internal Revenue Code. As enacted, the deduction amount is equal to the amount listed in the table below based on the taxpayer's AGI, as calculated under the Code:

(Effective for taxable years beginning on or after January 1, 2018; SB 257, s. 38.4(a), S.L. 2017-57.)

The 2017 General Assembly and the 2018 General Assembly amended this subsection to add two new subdivisions. Both amendments allow a taxpayer to deduct an item of income from the calculation of North Carolina taxable income only if the income item was included in the taxpayer’s calculation of federal adjusted gross income.

Subdivision (12) was added to provide a deduction from federal adjusted gross income for the amount deposited during the taxable year to a personal education savings account (“PESA”) under Article 39A of Chapter 115C of the General Statues, “Personal Education Savings Accounts.”

Subdivision (13) was added to allow a deduction from federal adjusted gross income for the amount paid to a taxpayer during the taxable year from the State Emergency Response and Disaster Relief Reserve Fund for hurricane relief or assistance. A taxpayer may not deduct any payment made to the taxpayer for goods or services provided by the taxpayer.

(The 2017 General Assembly amendment effective for taxable years beginning on or after January 1, 2018; SB 257, s. 10A.4(b), S.L. 2017-57. The 2018 General Assembly amendment effective for taxable years beginning on or after January 1, 2017; SB 99, s. 5.6(j), S.L. 2018-5.)

This section was amended twice as a result of significant changes made to the Internal Revenue Code by the Tax Cuts and Jobs Act (“TCJA”) passed in December 2017.

Subdivision (4) of G.S. 105-153.5(c), which required an addition to federal adjusted gross income for gross income from domestic production activities that a taxpayer excluded from federal taxable income under section 199 of the Internal Revenue Code, was repealed. TCJA repealed section 199 of the Code making this adjustment no longer necessary.

Subdivision (7) was amended to enable North Carolina individuals to take full advantage of the expanded benefits permitted under IRC section 529, as amended by TCJA. As amended, federal law allows a participant in a 529 plan to withdraw funds to pay for tuition in connection with a beneficiary’s enrollment at an elementary or secondary public, private, or religious school. In addition, federal law now allows an existing 529 saving plan to be rolled into a 529 ABLE account.

Prior to taxable years beginning on or after January 1, 2014, contributions made to a North Carolina 529 plan were deductible in determining an individual’s state taxable income. The 2016 General Assembly amended G.S. 105-153.5(c)(7) to require a taxpayer to add to adjusted gross income the amount of funds withdrawn from a North Carolina 529 plan if the amount withdrawn was not used for qualified higher education expenses to the extent the amount was deducted from state taxable income in a prior taxable year.

The General Assembly made the necessary conforming changes to G.S. 105-153(c)(7) to avoid penalizing an individual who took the state income tax deduction for contributions to a NC 529 Plan while the deduction was in effect. As rewritten, an individual does not have to add to federal adjusted gross income the amount of funds withdrawn if the funds are used for a purpose allowed under section 529 of the Code, as amended in the TCJA.

(First amendment is effective for taxable years beginning on or after January 1, 2018; SB 99, s. 38.1(f), S.L. 2018-5; second amendment is effective for taxable years beginning on or after January 1, 2018; SB 99, ss. 38.1(h), S.L.2018-5.)

The Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 (collectively, “federal tax provisions”) made significant changes to the federal individual income tax. To the extent North Carolina follows the Internal Revenue Code, the federal tax provisions apply to North Carolina for purposes of calculating an individual’s state tax liability. Subsection (c2) was amended to make the necessary adjustments to decouple North Carolina from federal provisions that North Carolina does not follow.

The Bipartisan Budget Act of 2018 retroactively extended through tax year 2017 the following provisions:

• The exclusion from income for the discharge of qualified principal residence indebtedness, and 
• The deduction in arriving at federal adjusted gross income for qualified tuition and related expenses as amended

Subdivision (1) of subsection (c2) requires an individual to add to federal adjusted gross income for tax year 2017 the amount excluded from the taxpayer’s gross income for the discharge of qualified principal residence indebtedness under section 108 of the Code. Subdivision (2) requires an individual to add to federal adjusted gross income for tax year 2017 the amount of qualified tuition and related expenses deducted from the taxpayer’s adjusted gross income.

The federal Tax Cuts and Jobs Act included a provision that provides a tax benefit to a qualified investor who invests capital gains into a qualified opportunity fund as defined under section 1400Z-2 of the Code. Subsection (c2) was further amended to add three new subdivisions to decouple North Carolina from the Internal Revenue Code with respect to the tax changes associated with investing in these zones.

New subdivision (5) requires an individual to add to federal adjusted gross income the amount of gain temporarily excluded from the taxpayer’s gross income under section 1400Z-2 of the Code because the gain was reinvested into a qualified opportunity fund as defined under the Code. The adjustment made to federal adjusted gross income does not result in a difference in basis of the affected assets for state and federal income tax purposes.

New subdivision (6) allows an individual to deduct the amount of gain included in federal adjusted gross income under section 1400Z-2 of the Code to the extent the same income was included in the taxpayer’s North Carolina taxable income in a prior tax year.

New subdivision (7) requires an individual to add to federal adjusted gross income the amount of gain permanently excluded from the taxpayer’s gross income under section 1400Z-2 of the Code because the gain was accrued from the sale or exchange of an investment in an Opportunity Fund held for at least 10 years.

(Effective June 12, 2018; SB 99, s. 38.1(c), S.L. 2018-5.)

This subsection was amended twice; once by the 2015 General Assembly and again by the 2017 General Assembly. Both amendments decreased the income tax rate imposed on an individual’s North Carolina taxable income.

The 2015 General Assembly amended this subsection to reduce the individual income tax rate for tax years beginning on or after January 1, 2017 from 5.75% to 5.499%. The 2017 General Assembly further reduced the individual income tax rate for taxable years beginning on or after January 1, 2019 from 5.499% to 5.25%.

(The 2015 General Assembly amendment was effective for taxable years beginning on or after January 1, 2017 and before January 1, 2019; HB 97, s. 32.16(c), S.L. 2015-241. The 2017 General Assembly amendment is effective for taxable years beginning on or after January 1, 2019; SB 257, s. 38.1(a), S.L. 2017-57.)

Subdivisions (1) and (2) of this subsection were amended to decouple North Carolina’s filing requirement from the federal filing requirement. Under prior law, an individual’s obligation to file a state income tax return was tied to the individual filing requirements under the Internal Revenue Code. After the enactment of the federal Tax Cuts and Jobs Act in December 2017, the federal standard deduction amount is larger than the North Carolina standard deduction amount. As amended, taxpayers with income less than the federal standard deduction amount but more than the North Carolina standard deduction amount are required to file a North Carolina tax return.

As amended and specifically stated in G.S. 105-153.8(a)(1), a resident individual is required to file a North Carolina individual income tax return if the taxpayer’s gross income under the Code exceeds the North Carolina standard deduction. Subdivision (2) requires a nonresident individual to file a North Carolina individual income tax return if the taxpayer’s gross income under the Code exceeds the North Carolina standard deduction and the taxpayer received North Carolina sourced income.

(Effective for taxable years beginning on or after January 1, 2018; SB 99, s. 38.1(g), S.L. 2018-5.)

This section was repealed by the 2017 General Assembly as part of the changes made to modify and expand the child tax deduction. Prior to repeal, G.S. 105-153.10 provided a taxpayer with a tax credit of up to $125 per child, depending on the taxpayer’s filing status and amount of adjusted gross income, if the taxpayer was allowed a federal tax credit under section 24 of the Internal Revenue Code.

With the repeal of G.S. 105-153.10 and the enactment of G.S. 105-153.5(a1), a taxpayer is allowed a deduction for each dependent child for whom the taxpayer is allowed a federal child tax credit under section 24 of the Internal Revenue Code. For more information on the child deduction, including the amount of the child deduction, see G.S. 105-153.5(a1) - Child Deduction Amount.

(Effective for taxable years beginning on or after January 1, 2018; SB 257, s. 38.4(b), S.L. 2017-57.)

This section was amended as part of a series of changes to the state’s federal corrections statutes, which are statutes that address a taxpayer’s obligation when the taxpayer’s federal taxable income is changed or corrected at the federal level and the change affects the amount of state tax payable. Specifically, the changes create a distinction between situations where the changes are a result of an action initiated by the Internal Revenue Service and situations where the changes are the result of an amended return voluntarily filed by a taxpayer.

The existing language in G.S. 105-159 was placed in new subsection (a) and was rewritten to clarify when a taxpayer must notify the Secretary of a federal determination that affects the amount of state tax payable. Subsection (a) also incorporates a cross-reference to a new definition of “federal determination” in G.S. 105-228.90 and makes other stylistic changes.

New subsection (b) was added to provide guidance to taxpayers who voluntarily file amended returns with the Internal Revenue Service and the adjustments affect state tax payable. New subdivision (b)(1) provides that if a taxpayer voluntarily files an amended federal return and the adjustment increases state tax payable, the taxpayer must file a state amended return within six months of filing the federal amended return. New subdivision (b)(2) provides that if a taxpayer voluntarily files an amended federal return and the adjustment decreases state tax payable, the taxpayer may file a state amended return within the general statute of limitations for obtaining a refund.

New subsection (c) was added to impose penalties against a taxpayer who fails to file a required amended state return within the timeframes set within G.S. 105-159.

(Effective June 12, 2018 and applies to federal amended returns filed on or after that date; SB 99, s. 38.3(b), S.L. 2018-5.)

Subdivision (13) of this section was amended to define "wages" for North Carolina withholding purposes. As rewritten, wages has the same meaning as defined under IRS section 3401. The definition no longer excludes employer reimbursements for an employee's ordinary and necessary business expenses.

(Effective June 12, 2018; SB 99, s. 38.1(d), S.L. 2018-5.)

This section was amended to incorporate the requirements of G.S. 105-159 located in Article 4, Part 2 into the provisions of Article 4A. As amended and specifically stated in G.S. 105-159(a), if the taxes an employer is required to withhold and pay under the Internal Revenue Code is changed or corrected, the taxpayer must file a state withholding tax return reflecting each change or correction from a federal determination within six months after being notified of each change or correction. In addition, pursuant to G.S. 105-159(b), if a taxpayer voluntarily files an amended withholding tax return with the Internal Revenue Service that increases state tax payable, the taxpayer must file an amended state withholding tax return with the Department within six months of filing the federal amended return. To review the requirements of G.S. 105-159, see G.S. 105-159 – Federal Determinations and Amended Returns located in the Individual Income Tax section and the North Carolina General Statutes.

(Effective June 12, 2018; SB 99, s. 38.3(d), S.L. 2018-5.)

This section was amended as part of a series of changes to the state’s informational return statutes.

As amended and specifically stated in G.S. 105-163.7(b), an employer must annually file an informational return with the Secretary that contains the information given on each of the employer’s written statements, i.e. form W-2 or applicable 1099 statement. The Secretary is permitted to require additional information to be included on the informational return. In general, the informational return is due on or before January 31 of the succeeding year and must be filed in an electronic format as prescribed by the Secretary. If an employer terminates its business or permanently ceases paying wages, the employer must file an annual informational return with 30 days of the last wage payment.

G.S. 105-163.7 was also amended to add new subsection (d). The language in subsection (d) is not new but was relocated from G.S. 105-236(a)(10)(b).

(Effective June 12, 2018; SB 99, s. 38.10(n), S.L. 2018-5.)

Subsection (b) of this section was amended to remove the tax credit for children from the list of tax credits an estate or trust was not permitted to claim. The tax credit for children was repealed making this exception no longer necessary.

(Effective June 12, 2018; SB 99, s. 38.10(l), S.L. 2018-5.)

This section was amended to incorporate the requirements of G.S. 105-159 located in Article 4, Part 2 into the provisions of Article 4, Part 3. As amended and specifically stated in G.S. 105-160.8, the provisions of G.S. 105-159 apply to fiduciaries required to file returns for estates and trusts.

(Effective June 12, 2018 and applies to federal amended returns filed on or after that date; SB 99, s. 38.3(c), S.L. 2018-5.)