North Carolina exempts all Social Security retirement benefits from income taxes. Other forms of retirement income are taxed at the North Carolina flat income tax rate of 5.499%. The state’s property and sales taxes are both moderate.
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- Our Retirement Expert
Jim Barnash, CFP Retirement
Jim Barnash is a Certified Financial Planner with more than four decades of experience. SmartAsset’s retirement expert is passionate about helping both individuals and business owners prepare for retirement. Jim has run his own advisory firm, worked for large financial services companies and even acted as a consultant to help other advisors grow their businesses. He is an author and public speaker on a variety of financial topics. Jim previously served for six years as President and Chairman for the Financial Planning Association. He also instructs others about the topic – Jim has created and taught courses on financial planning at DePaul University and William Rainey Harper Community College.
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North Carolina Retirement Taxes
From the Outer Banks to the Smoky Mountains, there are many wonderful places in North Carolina to settle down for your retirement. Whether you prefer sitting on the beach, hitting the links or exploring nature, there will be plenty of opportunities to do what you love in the Tar Heel State.
While North Carolina’s retirement taxes aren’t quite as low as several other southeastern states, many retirees will find them acceptable. North Carolina exempts all Social Security retirement benefits from income taxes. Other forms of retirement income are taxed at the North Carolina flat income tax rate of 5.499%.
Other taxes seniors and retirees in North Carolina may have to pay include the state’s sales and property taxes, both of which are moderate. Read on to learn about these and other retirement taxes in North Carolina.
Is North Carolina tax-friendly for retirees?
North Carolina is moderately retirement tax-friendly. It does not tax Social Security retirement benefits. The state also has low property taxes and sales taxes near the national average. Seniors with significant income from sources other than Social Security will have a larger tax bill in North Carolina. The state taxes other forms of retirement income as regular, non-deductible income.
Is Social Security taxable in North Carolina?
No. All Social Security retirement income can be subtracted from your taxable income when you file your North Carolina income tax return.
Are other forms of retirement income taxable in North Carolina?
Yes. Income from a pension, a 401(k), an IRA and any other type of retirement account are all taxed at the North Carolina state income tax rate of 5.499%.
Unlike many other states, North Carolina does not allow deductions on any type of retirement income. However, the North Carolina standard deduction is fairly large. It is $8,750 for single filers, $17,500 for joint-filers and $14,000 for heads of household.
How high are property taxes in North Carolina?
North Carolina has relatively low property taxes. The state’s average effective property tax rate is 1.05%. This means that on average homeowners can expect to pay about $1,050 annually for every $100,000 in home value.
Low property taxes are one reason housing costs in North Carolina are 4% lower than the national average. That also contributes to North Carolina’s low cost of living. When including things like transportation and food, the cost of living in North Carolina is 1.7% below the national average.
What is the North Carolina low-income homestead exclusion?
Older homeowners (age 65 and older) with household income of no more than $29,600 can claim the North Carolina low-income homestead exclusion. The exclusion is subtracted from taxable value and is equal to either $25,000 or 50% of taxable value, whichever is greater. For eligible seniors, this can mean hundreds in property tax savings every year.
Senior homeowners whose income is no more than $44,400 may also qualify for a property tax deferral via the Circuit Breaker Tax Deferment Program. This does not reduce property taxes but defers payment of taxes owed until a later time, typically when the home is sold.
How high are sales taxes in North Carolina?
North Carolina’s total state and average local sales tax rate is 6.9%. This ranks as the 24th highest in the nation. In other words, it is close to average. In most counties, the total rate is either 6.75% or 7%. The exceptions are Durham County and Orange County, where the rate is 7.5%.
Unlike many states, North Carolina taxes groceries, albeit at a reduced rate. The rate on most food is 2%. Prescription drugs are fully exempt from the sales tax.
What other North Carolina taxes should I be concerned about?
North Carolina eliminated its estate tax in 2014, so seniors who are planning on leaving wealth or property for their loved ones don’t need to worry about that.
Retirees with investment income outside of a retirement account should be aware that capital gains in North Carolina are treated as regular income. They are taxed at the state rate of 5.499%.
Most Tax Friendly Places for Retirees
SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.
Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.
To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.
We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.
In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.
For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.
For each city we determined whether or not Social Security income was taxable.
Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.
Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration