Deductions from Federal Adjusted Gross Income
-State Income Tax Refund. Enter the amount of any state or local income tax refund that is included in federal adjusted gross income.
-Interest from United States Obligations. Enter the amount of interest received from notes, bonds, and other obligations of the United States (such as U.S. savings bonds, treasury notes and bills, etc.) or United States possessions.
-Taxable Portion of Social Security and Railroad Retirement Benefits. Social security and railroad retirement benefits are not subject to State income tax. Enter any Title 2 social security benefits received under the Social Security Act and any Tier 1 or Tier 2 railroad retirement benefits received under the Railroad Retirement Act that were included in federal adjusted gross income. Railroad Retirement Act benefits include railroad unemployment insurance benefits and railroad sickness benefits.
-Retirement Benefits Received by Vested Government Retirees (Bailey Settlement). As a result of the North Carolina Supreme Court’s decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local governments or by United States government retirees (including military). The exclusion applies to retirement benefits received from certain defined benefit plans, such as the North Carolina Teachers’ and State Employees’ Retirement System, the North Carolina Local Governmental Employees’ Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees’ Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989. The exclusion also applies to retirement benefits received from the State’s §401(k) and §457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989. The exclusion does not apply to local government §457 plans or to §403(b) annuity plans. Benefits from other State, local, and federal retirement plans may or may not be excluded depending on rulings in the Bailey case.
The exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions. A retiree entitled to exclude retirement benefits from North Carolina income tax should claim a deduction on Line 10 for the amount of excludable retirement benefits included in federal adjusted gross income. Even if all your retirement is excludable under Bailey, you must still file a North Carolina return if you meet the minimum gross filing requirements on Page 6. A copy of Form 1099-R or Form W-2 received from the payer must be attached to the return to support the deduction.
-Adjustment for Bonus Depreciation. You may deduct an amount equal to 20% of the bonus depreciation deduction added to federal taxable income or federal adjusted gross income on your 2013, 2014, 2015, 2016, and 2017 State tax returns.
-Adjustment for IRC Section 179 Expense Deduction. You may deduct an amount equal to 20% of the IRC section 179 expense deduction added to federal taxable income or federal adjusted gross income on your 2013, 2014, 2015, 2016, and 2017 State tax returns.
-Other Deductions from Federal Adjusted Gross Income. Enter the total amount of the following other deductions. Make sure you attach an explanation or schedule of the item(s) to Form D-400.
(1) The gain from the sale or disposition of North Carolina obligations issued before July 1, 1995, is deducted from adjusted gross income if the law under which the obligations were issued specifically exempts the gain.
(2) The amount by which your basis of property for State purposes exceeds your basis of property for federal purposes must be deducted from your adjusted gross income in the year that you dispose of the property.
(3) Income that meets both of the following requirements:
a. Is earned or received by an enrolled member of any federally recognized Indian tribe.
b. Is derived from activities on any federally recognized Indian reservation while the member resides on the reservation. Income from intangibles having a situs on the reservation and retirement income associated with activities on the reservation are considered income derived from activities on the reservation.
(4) The amount by which the deduction for an ordinary and necessary business expense was required to be reduced or was not allowed under the Internal Revenue Code because you claimed a federal tax credit in lieu of a deduction.
(5) In the event of an actual or deemed transfer of an asset occurring on or after January 1, 2013, wherein the tax basis of the asset carries over from the transferor to the transferee for federal income tax purposes, the transferee must add any remaining bonus depreciation deductions allowed to the basis of the transferred asset and depreciate the adjusted basis over any remaining life of the asset. The transferor is not allowed any future bonus depreciation deductions. (For more information, see G.S. 105-153.6(e) and (f), as well as the Department’s website.)
(6) The amount of cancellation of indebtedness (COD) included in federal adjusted gross income that was previously deferred under section 108(i) (1) of the Internal Revenue Code in tax years 2009 or 2010. Note: N.C. did not conform to the federal provision that allowed certain taxpayers to elect to defer the reporting of income from the cancellation of indebtedness (COD) in tax years 2009 or 2010 and instead report the income ratably over a five-year period beginning in 2014.
(7) You may deduct the amount deposited during the taxable year to a personal education savings account (“PESA”) under Article 39A of Chapter 115C of the General Statues to the extent the deposit was included federal adjusted gross income.
(8) You may deduct the amount paid from the State Emergency Response and Disaster Relief Reserve Fund for hurricane relief assistance to the extent this amount is included in federal adjusted gross income. This amount does not include amounts paid to you from the State Emergency Response and Disaster Relief Fund for goods or services provided by you.
(9) You may deduct a gain included in federal adjusted gross income under IRC section 1400Z-2 to the extent the same amount was included in the calculation of N.C. taxable income for tax year 2017.