2013 NC Tax Law Changes for Individuals

On July 23, 2013 NC Governor Pat McCrory signed the recently passed tax revisions into law.  The changes will take effect January 1, 2014 for tax years 2014 and beyond.  Here are the highlights of what did and did not change (not an all-inclusive list):


(See separate list for changes to Corporate taxes)

  • The current three-tiered tax rate system (6, 7 and 7.75%) is replaced by flat tax rate of 5.8% in 2014 and 5.75% in 2015 and beyond.
  • Personal exemptions are eliminated.
  • Standard deduction amounts are increased.
  • Married taxpayers who file jointly and itemize deductions are limited to a combined mortgage interest and property tax deduction of $ 20,000 on their primary residence (for Single taxpayers the limit is $ 10,000, for Head of Household taxpayers the limit is $ 16,000).
  • No change in treatment of charitable contributions for taxpayers who itemize deductions on their federal return but taxpayers using standard deduction lose the tax credit for charitable contributions above the state threshold.
  • No change in treatment of “vested” participants in NC-exempt pensions but the (up to) $ 2,000 private retirement income deduction and (up to) $ 4,000 government retirement deductions are eliminated.
  • Social Security benefits remain untaxed in North Carolina.
  • The (up to) $ 50,000 per taxpayer deduction for net income from self-employment is eliminated.
  • Changes to Child Tax Credit depending on income – some credits are higher, some remain the same and some are eliminated.
  • Tax credits for child care, permanent and total disability, education expenses and property taxes paid on farm machinery are eliminated.
  • Deduction for making contributions to the NC 529 plan is eliminated.
  • Energy Star tax credits are eliminated.
  • Earned Income Tax Credit is eliminated (it was scheduled to expire on December 31, 2013 anyway).



  • Estate tax is eliminated.
  • No change to state sales tax rate.
  • No change to how food is taxed (sales tax) although some specialized bakery items lose their preferred tax rate status effective July 1, 2014.
  • Prescription drugs remain exempt from sales tax.
  • Movie tickets and other amusements now subject to full sales tax rate instead of reduced privilege tax rate.
  • Tax rate levied on electricity and piped natural gas increases from 3% to 7%.
  • Changes made to various other sales tax categories (too numerous to list here but are to very specific sales).
  • Back-to-school sales tax “holiday” is eliminated.
  • State gasoline tax capped to 37.5 cents through June 30, 2015.

If you have questions about any of these changes, please contact our office.

Health Care Act

On June 28th, 2012 the U.S. Supreme Court voted to uphold the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act (HCERA).  What does this mean for taxpayers?

Starting with tax years beginning after December 31, 2012 (so January 1st, 2013 for calendar year taxpayers) there are additional taxes that will be levied:

The 0.9% Medicare Tax:

An additional 0.9% Medicare tax on wages and self-employment income for individuals with compensation in excess of $200,000 ($250,000 for married couples filing jointly, $125,000 for married couples filing separately).  Employers will be required to withhold the extra 0.9% from an employee’s paycheck if the employee receives wages over $200,000.  However, it is possible to get into this tax class without having sufficient withholding to cover the extra tax.

For instance, say I make $150,000 and my spouse also makes $150,000.  Since individually we do not make over $200,000, our employers will NOT be withholding this additional tax from our paychecks.  We will have to pay the additional Medicare tax with our 2013 tax returns.  These amounts would increase our tax bill by $450.

The 3.8% Medicare Tax:

This change is a little more complicated.  This tax will be placed on the lesser of Net Investment Income or Modified AGI (adjusted gross income).  First, what is investment income?  This can include many different things like interest, dividends, capital gains, annuities, and royalties.  Rents can also be included as unearned income, but the rules for determining if rents are earned or unearned are beyond the scope of this article.  Specifically excluded from Net Investment income are self-employment income, income from an active trade or business, IRA or qualified plan distributions and income from charitable remainder trusts.

The threshold amount for Modified AGI is $250,000 (Married filing jointly), $125,000 (Married filing separately) or $200,000 (all other taxpayers).

For example, say my spouse and I are filing together and have $300,000 in salary income and $100,000 of Net Investment Income.  The amount subject to the 3.8% surtax is the less of our Net Investment Income ($100,000) or the amount of our Modified AGI (salary + investment income) over the threshold ($400,000-$250,000 = $150,000).  Because Net Investment Income is lower than the amount of the threshold ($100,000 versus $150,000), the amount subject to the tax would be $100,000 and the surtax payable is $3,800.

For more information, or a detailed analysis of how these laws will impact you, please contact our office.


2013 Payroll Tax Update

As you have probably heard on the news yesterday Congress, passed an extension of the “Bush-era” tax rates for most taxpayers.  The President has not yet signed the bill into law but that is expected to happen later today.

Although this sounds like the rates will be identical to 2012 there are actually subtle differences which will result in slightly different tax amounts for the same income.  For example, there are slightly higher personal exemption and standard deduction amounts in 2013 and those are factored in to the tables most employers use.  The boundaries of the tax brackets usually vary a small amount from year to year.  We are monitoring our sources and will let you know where to find revised tax tables as soon as they are published.

If you are in a position where you MUST calculate payroll for 2013 before the new rates are available then continue to use the Circular E tax tables for 2012.  We should certainly have revised tax tables by the end of the week.

As expected, the “payroll tax holiday” which resulted in a lower Social Security withholding percentage for employees the last two years was NOT extended.  You should resume withholding 6.2% FICA (Social Security) and 1.45% Medicare on all 2013 wages.  The employer matching percentages will be those same amounts.  The earnings limit for FICA in 2013 is $ 113,700.  There is still no limit for Medicare withholding.

Be sure to use the revised amounts when computing 941 tax payments for pays which occur in 2013.

Many of you will be depositing fourth quarter 941 taxes for December before January 15.  You should use the old matching rules when calculating that tax payment and be sure to indicate it is for the fourth quarter.

If you need help in calculating your payroll or have any questions regarding this, please contact our office.


North Carolina Deduction for Net Business Income

For tax years beginning January 1, 2012, North Carolina offers a new deduction for taxpayers who include net business income in their Adjusted Gross Income (AGI) as reported on their North Carolina individual income tax return. The statute allows a deduction of up to $50,000 of net business income included in AGI that is not considered passive under Internal Revenue Code (IRC). For married couples filing a joint return where both spouses report a net business income, the maximum amount applies separately to each spouse’s net business income included in AGI, not to exceed a total of $100,000.

Net business income that is not considered passive is the total of all business incomes and losses (excluding passive incomes and passive losses) reported on Federal Schedules C, E, & F. For income or loss reported on Schedule E Part II, non-passive business income or loss is computed by subtracting non-passive loss and deductions allowed under IRC Section 179 (with respect to non-passive income) from non-passive income.

IRC Section 469 and Treasury Regulation §1.469 provide the official interpretation on when income or loss is considered passive. Generally real estate rental income or loss is considered passive – whether individually owned and reported on Schedule E Part I or reported on Schedule E Part II from a pass-through entity. There are however cases where taxpayers may qualify and subsequently the real estate rental income or loss may be recharacterized from passive to non-passive (i.e. taxpayer considered to be a real estate professional); in this instance the taxpayer is entitled to the net business income deduction.

If you need help in determining the amount of the net business income deduction to which you are entitled, please contact our office.

Additional 0.25% Local Sales & Use Tax For 4 North Carolina Counties

Effective April 1, 2012, the local sales and use tax in Buncombe, Durham, Montgomery and Orange counties increases to 2.25% from 2.0%; this increases the general State and local tax rate to 7.00% from the current 6.75% in these four counties. While the additional 0.25% local sales and use tax increase applies to all transactions subject to the general rate of sales and use tax (as provided in NC General Statute 105-164-4), the increase does not apply to sales of food subject to the 2.00% rate of tax.

Thus beginning April 1, 2012, the general State and local tax rate is 6.75% (4.75 + 2.00) in seventy-six (76) counties; 7.00% (4.75 + 2.25) in twenty-three (23) counties including Alexander, Buncombe, Cabarrus, Catawba, Cumberland, Duplin, Durham, Halifax, Haywood, Hertford, Lee, Martin, Montgomery, New Hanover, Onslow, Orange, Pitt, Randolph, Robeson, Rowan, Sampson, Surry and Wilkes; and 7.25% (4.75+2.5) in one (1) county, Mecklenburg (Charlotte).

If you have any questions about this rate change, please contact our office.

2012 Pension Plan Limitations

The Internal Revenue Service (IRB-2011-103) announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2012. Some of the limitation changes are detailed below, other applicable pension plan limitations can be viewed on our website’s Contributions & Allowance tab for 2012. For additional information and retirement planning assistance, please contact our office.

Changed Limitations:

• The elective deferral (contribution) limit for employees participating in 401(k), 403(b), most
457 plans and the federal government’s Thrift Savings Plan increases from $16,500 to 17,000.
The catch-up contribution for taxpayers aged 50 or older remains unchanged at $5,500.

• The deduction for taxpayers making contributions to a Traditional IRA is phased out for married couples filing jointly (MFJ) who have a modified adjusted gross income (MAGI) between $92,000 to $112,000, where the spouse making the IRA contributions is covered by a workplace retirement plan. For singles and heads of household who are covered by a workplace retirement plan, the MAGI phase-out range is from $58,000 to $68,000. For a taxpayer who is not covered by a workplace retirement plan but is married to someone who is covered, the MAGI deduction phase-out range is between $173,000 to $183,000.

• The adjusted gross income (AGI) phase-out range for married couples filing jointly making contributions to a Roth IRA is $173,000 to $183,000 for 2012. For singles and heads of household the phase-out range is $110,000 to $125,000. For a married taxpayer who is filing a separate return and covered by a workplace retirement plan the phase-out range remains $0 to $10,000.

• The AGI limit for the retirement savings contribution credit (saver’s credit) is $57,500 for married couples filing jointly; $43,125 for heads of household; and $28,750 for singles and married individuals filing separately.

• The annual compensation limit under Sections 401(a)(17), 404(I), 408(k)(3)(C) and 408(k)(6)(D)(ii) increases to $250,000.

• The limitation for defined contribution plans under Section (415(c)(1)(A) increases in 2012 to $50,000.

Expanded 1099 Reporting Requirements Repealed

On April 14, 2011, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act was signed into law.  This Act repeals both the expanded Form 1099 information reporting requirements mandated by the 2010 health care legislation and also the Form 1099 reporting requirements imposed on taxpayers who receive rental income enacted as part of the 2010 Small Business Jobs Act.  Basically businesses and taxpayers who receive rental income from real estate revert back to the Form 1099 reporting requirements prior to the passage of the 2010 Patient Protection and Affordable Care Act and 2010 Small Business Jobs Act, as if either Act had never occurred.

The 2011 legislation did not however repeal the increase in the information reporting penalties that were also mandated in the Small Business Jobs Act of 2010. The minimum and tiered penalties under IRC 6721 remain the same as enacted by the 2010 Act.

Change in Social Security Withholding

Under the Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010 (H.R. 4853), as of January 1, 2011 the amount of Social Security withheld from an employee’s paycheck has changed. For 2011, 4.2% is withheld from the employee’s paycheck (down from 6.2%). The employer share of Social Security remains at 6.2%. Please see the illustration below.

Jan’s Paycheck:
Gross:                    $ 1000.00
SS:                        ($     42.00)
Medicare:              ($     14.50)
Federal                 ($   100.00)
State:                    ($     75.00)

The paycheck to Jan should be $768.50.

The Federal Payroll Deposit (which must now be done over the phone or online as Form 8109 deposits through banks will no longer be accepted) should be as follows:

Employer Social Security (6.2%)           $  62.00
Employee Social Security (4.2%)          $  42.00
Employer Medicare (1.45%)                  $  14.50
Employee Medicare (1.45%)                 $  14.50
Federal Withholding                              $100.00

Total Deposit                  $233.00

If you have already paid your employees before updating the Social Security withholding, you are required to make up for any underpayments. The new rate must be in place by January 31, 2011 and all underpayments must be reimbursed to employees through paychecks by March 31, 2011. If you use payroll software (such as Quickbooks), it may make the changes automatically, but we recommend that you verify that the correct amounts of Social Security are being withheld.

If you have any questions regarding any of these changes, please contact our office.

Self Employment Income

For tax years beginning after December 31, 2009, self-employed individuals may now use the deduction for the cost of health insurance in calculating net earnings from self-employment for purposes of determining self-employment taxes. In prior years self-employed individuals were able to take a deduction for health insurance costs paid for the individual and his/her immediate family, for income tax purposes. However, in determining the self-employed income subject to self-employment taxes, the self-employed individuals were not allowed to deduct any health insurance costs.

The Small Business Jobs Act of 2010 signed into law on September 27, 2010 contains the provision that enables self-employed individuals to now have similar tax savings benefits for health insurance premium costs as allowed to employees. Please contact our office if you have any questions.

Rental Property Owners must issue 1099’s for certain 2011 expenses

Part of the recently passed Health Care Act contains a provision which will require rental property owners to start issuing 1099 forms for certain goods and services claimed as rental expenses. Starting in 2011, if an owner pays more than $ 600 per year to a single contractor or service provider the recipient (and the IRS) must be sent a properly completed 1099 form or the deduction may be disallowed.

The $ 600 threshold is the total paid to a recipient during the year for all properties, not single payments or individual properties. For example, if you own four properties and pay someone $ 400 to paint each one you must issue a 1099 for $ 1,600 or each of the $ 400 deductions may be disallowed. Property managers, plumbers, electricians, roofers, exterminators and yes, even accountants are among those who must be issued a form if you pay them more than $ 600 a year and claim the expense on Schedule E.

To properly complete a 1099 form you must have the recipient’s legal name (not just their “doing business as” name), a valid address and their tax ID number (either Federal ID number if they are a business or Social Security Number if they are a proprietor). Up until now businesses only had to issue 1099’s to recipients who are not incorporated but the law which now applies to rental property owners pertains to all recipients.

1099 forms must be issued in January 2012 for payments made during 2011. The time to gather the necessary information is before you make payments in excess of $ 600 to a recipient. The best way to ensure that you get the proper information is to have the recipient complete Form W-9 (available free at www.irs.gov) and return it to you before you start paying them. If the recipient is unwilling to provide the required information you may legitimately withhold a percentage of their payment as “backup withholding” and report it on Form 1099 with as much other information as you have. They must then file that form to get credit for the money you withheld.

If the IRS determines that 1099’s were not filed as required not only could your expenses be disallowed but you may also be subject to penalties for missing forms or forms with incorrect information.

Our office can assist you with Form 1099 preparation and filing. It is in your best interest to have all the necessary information available to save us time and save you money.

If you have questions or concerns about this new law, please contact us.