North Carolina Income Tax in 2026: What Residents and Business Owners Should Know
If you live or work in Franklin or anywhere in Western North Carolina, you may have noticed that North Carolina's income tax keeps changing. The rate has dropped several years in a row, and more cuts are on the way. Here is a plain-language look at how North Carolina taxes income today, what is changing, and what it can mean for individuals and business owners.
What Is North Carolina's Income Tax Rate for 2026?
For 2026, North Carolina has a flat individual income tax rate of 3.99%, down from 4.25% in 2025. "Flat" means the same rate applies to all of your North Carolina taxable income, rather than rising in brackets as your income grows. North Carolina also does not have local income taxes.
The rate is scheduled to keep falling. In July 2026, Governor Josh Stein signed S.B. 257, which lowers the rate from 3.99% to 2.99% over seven years, with 3.49% applying for tax years 2027 through 2029.
Tax rates are set by the legislature and can change, so it is always worth confirming the current rate with the North Carolina Department of Revenue (NCDOR) before you file.
Does North Carolina Tax Social Security?
No. According to the NCDOR, if your Social Security or railroad retirement benefits were taxed on your federal return, you may deduct them on your North Carolina return.
Other retirement income is a different story. Because North Carolina starts with your federal adjusted gross income, IRA withdrawals and most pensions are generally taxed as ordinary income. Some government and military retirement benefits may qualify for an exclusion if you meet certain requirements, so it is worth checking the NCDOR guidance or asking your CPA whether it applies to you.
What Other North Carolina Taxes Should You Know About?
North Carolina does not have an estate tax or an inheritance tax. The state sales tax rate is 4.75%, and local sales taxes are added on top, so the total you pay depends on your county.
What Business Owners Should Know
If you own a sole proprietorship, an S corporation, or a partnership, your share of the business income generally flows through to your personal return and is taxed at the same flat rate. S corporations also file their own North Carolina return, even though the income is generally taxed at the owner level.
North Carolina also offers an optional election that many business owners have heard about: the taxed pass-through entity (PTE) election. Under this election, an eligible S corporation or partnership can choose to pay North Carolina income tax at the entity level for tax years beginning on or after January 1, 2022. The law was designed to reduce the impact of the federal cap on state and local tax deductions. Sole proprietorships are not eligible.
Whether the election makes sense depends on your owners, your income, and your overall federal tax picture. It is worth reviewing with your CPA before you make it.
Living Near the State Line
Western North Carolina sits close to Georgia and Tennessee, and many people live in one state and work in another. Georgia has a flat income tax rate of 4.99% for 2026, while Tennessee has no personal income tax. If you live in one state and earn income in another, you may need to file more than one state return. For North Carolina residents, a credit for tax paid to another state can help prevent double taxation, but the credit is limited, so the details matter.
Frequently Asked Questions
What is the North Carolina income tax rate for 2026?
The flat rate is 3.99% for tax year 2026.
Does North Carolina have a graduated income tax?
No. North Carolina uses one flat rate for all taxable income.
Does North Carolina have local income taxes?
No. The state income tax is the only income tax.
Will the North Carolina income tax rate go down again?
Under S.B. 257, the rate is scheduled to drop to 3.49% for tax years 2027 through 2029, with further reductions planned after that.
Is Social Security taxable in North Carolina?
No. You may deduct Social Security benefits that were taxed on your federal return.
Does North Carolina have an estate tax?
No. North Carolina has no estate tax and no inheritance tax.
Talk With a CPA About Your North Carolina Taxes
Tax rates and rules are only part of the picture. How they apply to you depends on your income, your retirement plans, and how your business is structured. If you have questions about North Carolina taxes or want to plan ahead for 2027, we are here to help. Call Denise Stubbs CPA at (828) 570-5760 or email Info@DeniseStubbsCPA.com.
This blog post is provided for educational purposes only and does not constitute personalized financial, tax, or investment advice. Tax laws are complex, change frequently, and vary based on individual circumstances. Before implementing any strategies discussed, please consult with qualified financial advisors, tax professionals, or CPAs who can assess your specific situation. This content should not be relied upon as a substitute for professional consultation.
Comments