In order to compete with neighboring states and to rid itself of the fifth highest unemployment rate, the Senate and House of North Carolina were able to seal the deal on a new tax code. With the newly minted tax reform deal in place, the state of North Carolina looks like it could be an ideal destination for those who have reached retirement time. The deal not only looks to help those looking to leave the job market but it also assists those who are entering it.
Here are some of the highlights of the plan which will directly affect those retired:
- The plan will lower income tax rates to a flat rate of 5.8% in 2014 and 5.75% in 2015. In the current three-tiered system, the top rate of 7.75% kicks in on earnings over $60,000 for a single and $100,000 for a couple, and the second tier 7% rate starts at with earnings of just $12,750 for a single and $21,250 for a couple. Further rate reductions could be triggered by revenue growth in 2016 and 2017.
- The plan will abolish the state estate tax retroactive to Jan. 1, 2013. Currently, North Carolina has a generous exemption of $5.25 million per person that matches the federal estate tax exemption. North Carolina’s move will bring the tally of states where you have to worry about a separate state estate or inheritance tax down to 19 states–plus the District of Columbia.
- The plan will continue to exempt Social Security income from state taxation. The AARP and other groups lobbying won out to keep Social Security payouts state income-tax free.
Efforts to raise taxes on food and prescription medications failed, which is further good news for retirees. In addition, the sales tax will not be raised in the state. This is vital to retirees because “increased sales taxes can hit people on fixed incomes more severely than wage earners” says Elizabeth Malm, an economist at the Tax Foundation.
Though the deal makes the state more tax-friendly for retirees, there are parts of the deal that are not so desireable.
The deal eliminates a $2,000 tax break for private pension income, which includes required minimum distributions from Individual Retirement Accounts. Luckily, this can be offset with the increase in the standard deduction from $3,000 to $7,500 for singles and from $6,000 to $15,000 for a couple. “This makes less income subject to income tax, lowering overall tax liability” notes Malm.
Finally, think you want to buy a beach home or cabin out in the Great Smokeys? It might not be the best idea unless you’re rich enough to pay in cash. The sales taxes on modular homes will be going up; the tax deal limits itemized deductions allowed for mortgage interest and property taxes to $20,000 a year.
Though the deal has some non-desirable points, it appears as though the state is looking to make the necessary changes to the code to make it more appealing to live in for those entering and leaving the job market.
- New Tax Reforms Make North Carolina More Appealing to Retirees (lawprofessors.typepad.com)
- The 2013 Tax Package (wral.com)
- Tax reform bill passes NC House and Senate (myfox8.com)
- North Carolina as the new Wisconsin (blogs.reuters.com)
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.