The state of North Carolina offers numerous income tax deductions for retirees, college students, homeowners and investors. North Carolina tax breaks that you may qualify for include deductions for retirement income, severance pay, education expenses and mortgage interest. In certain cases, you may qualify for both a federal tax credit and North Carolina deduction for the same type of expense. The North Carolina Department of Revenue collects income taxes in the state and its tax rules can change yearly.
If you receive railroad retirement or Social Security benefits on which you pay federal taxes, you may qualify for a tax deduction on your North Carolina income taxes. However, if you do not pay federal taxes on all of your Social Security or railroad retirement benefits, you may face North Carolina income tax liability on the untaxed portion. The North Carolina railroad retirement and Social Security deduction does not apply to income received from a private retirement plan sponsored by a railroad company. However, North Carolina offers another tax deduction up to $2,000, at the time of publication, for qualified taxpayers who receive benefits through private retirement programs. If you receive retirement benefits from a local, state or federal government, you may qualify for a North Carolina tax deduction up to $4,000.
If you lose your job as the result of a layoff, North Carolina allows you to deduct a maximum of $35,000 in severance pay on your state income tax return at the time of publication. The state also offers a special $250 tax deduction if you work as an unpaid firefighter or rescue squad worker. You must meet work or training hours requirements to qualify, and if you work as an unpaid volunteer in both positions, you can only take one deduction.
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Interest Earnings and Payment Deductions
North Carolina does not levy taxes on interest income from investment vehicles issued by the federal government, such as U.S. Savings Bonds, and allows you to deduct such earnings. If you itemize your federal tax deductions and claimed a federal mortgage interest tax credit on a home loan, you may also qualify for a tax deduction on your North Carolina income tax return.
If you qualify for a federal tax deduction for college expenses, but instead claim a federal tax credit under the Lifetime Learning, Hope or American Opportunity programs, you may qualify for a tax deduction on your North Carolina tax return. In such cases, you may qualify for the same amount of deduction allowed on your federal tax return. For instance, if you qualified for $4,000 tuition and fees deduction on your federal tax return, but instead took a $1,500 tax credit through the Hope program, you may qualify for a North Carolina tax deduction of $4,000. If you contribute to the Parental Savings Trust Fund, North Carolina's 529 college savings fund, you may qualify for a deduction on your state tax return. North Carolina allows you to take a deduction on up to $2,500 in contributions, or $5,000 if you are married and file jointly, at the time of publication.
- North Carolina Department of Revenue: Social Security and Railroad Retirement Benefits
- North Carolina Department of Revenue: Retirement Benefits Deduction
- North Carolina Department of Revenue: Severance Pay
- North Carolina Department of Revenue: Interest Income from U.S. Obligations
- North Carolina Department of Revenue: North Carolina’s 529 College Savings Plan
- North Carolina Department of Revenue: Deduction for Voluntary Firefighters and Rescue Squad Workers
- North Carolina Department of Revenue: Federal Mortgage Interest Tax Credit