Map of District 49

Tax Credits and Other Changes in Tax Laws for 2007 & 2008 This session, the General Assembly came up with several ways to cut taxes for the people of North Carolina without sacrificing the quality of our public services.  Some of these changes will benefit you this tax season, while others can’t be claimed until next year. I hope this information is of use to you as the deadline for tax filing approaches.  Individual Income Taxes  Earned Income Tax Credit  We created a 3.5 percent refundable earned income tax credit. This tax credit would lower the tax burden for many of the working people who earn about $40,000 or less. And because it’s refundable, they may get tax refunds they may not have otherwise received. North Carolinian taxpayers who are eligible for the federal earned income tax credit are eligible for the state credit. This tax credit will become effective for the 2008 taxable year.  Upper-Income Tax Bracket  Legislators allowed a temporary income tax increase put in place during the economic downturn of 2001 to expire. The change meant that married couples filing jointly with an income over $200,000 were taxed at 8.25 percent, a half-percent higher than the previous level.  This change will be effective for the 2008 tax year and returns the rate to 7.75 percent.  Long-term Care Insurance Tax Credit  The General Assembly approved a $7 million a year tax credit for families that purchase long-term care insurance. This tax credit allows a credit of 15 percent of the premiums paid for long-term care insurance during the taxable year and is limited to taxpayers earning less than $100,000 for a married couple.  Up to $350 is allowed for each long-term care insurance contract.  Please note that this tax credit became effective in 2007 and can be claimed in returns filed this spring.  Adoption Expenses Tax Credit  This year we created a tax credit to benefit those who adopt a child.  Taxpayers who are eligible for the federal tax credit for adoption expenses are also eligible for the state tax credit.  The state tax credit is equal to 50 percent of the federal tax credit and has a maximum amount of $5,695.  This tax credit also became effective in 2007 and can be claimed in returns filed this spring. Nonprofits and Renewable Energy Property Legislators approved a credit for individuals and businesses that make donations to tax-exempt charitable organizations so that the organization can invest in renewable energy property.  Taxpayers must choose between claiming this credit or taking a deduction for the charitable contribution.  This tax credit will be effective for the 2008 taxable year.  Volunteer Firefighter and Rescue Squad Workers  My colleagues and I approved a $250 tax deduction for volunteer firefighters and rescue squad workers who attend 36 hours of drills, training, or meetings during a year.  This tax credit is effective for the 2007 tax year and can be claimed in returns filed this year.  Sales Tax Sales Tax Holiday North Carolinians benefit from a sales tax holiday each year in the first weekend in August.  Previously the sales tax holiday applied to school items that cost less than $100.  This year the General Assembly increased the cap to $300 because some college textbooks cost more than $100.  This cap increase will become effective for the sales tax holiday in 2008. Farmers and Manufacturers The General Assembly approved a phase-out of the sales tax on piped natural gas, electricity, and other fuels (excluding motor fuel) sold to farmers and manufacturers.  The taxes will be phased out over the next three years. Property Taxes Property Tax Homestead Exclusion The property tax homestead exclusion helps low-income disabled and elderly people keep their homes.  Under previous law, $20,000 or 50 percent (whichever amount is greater) of the value of the homestead was excluded from taxation.  This session we increased that amount to $25,000 or 50 percent of the homestead.  We also increased the income eligibility limit of the program to $25,000.  It was previously capped at $20,500.  These changes will become effective for the 2008 tax year. Property Tax Homestead Circuit Breaker This year we created a property tax homestead circuit breaker program so that the amount of tax paid on a homestead does not exceed a fixed percentage of the taxpayer’s income.  Any taxes on the homestead that exceed the applicable percentage are deferred and become a lien on the property.  This program will make more people eligible for some form of property tax relief because the income eligibility limits are 50 percent more than the limits for the property homestead tax exclusion.  It will be effective for the 2009 tax year. Back to Top

North Carolina's New Work Opportunity Tax Credit (WOTC) The information cited below was compiled by the North Carolina Merchants Association from documents obtained from the General Assembly Fiscal Research staff.  I believe this material will be important for all small business owners.  Work Opportunity Tax Credit. – Section 31.21 of House Bill 1473 (the State Budget) included a newly created State income tax credit for business utilizing the federal Work Opportunity tax credit (WOTC) under the Internal Revenue Code. The WOTC started out as a stand-alone bill filed by Representatives William Wainwright (D-Craven), Garland Pierce (D-Hoke) and Pryor Gibson (D-Anson) and Senator David Hoyle (D-Gaston). The provision eventually ended up in the final version of the State Budget. Many business groups told members of the North Carolina General Assembly that they took advantage of the federal WOTC and that a State WOTC would also be helpful.   The amount of the State WOTC credit is equal to 6% of the amount of credit allowed under the Federal WOTC credit. The credit may be claimed against the franchise tax or the income tax. The taxpayer must elect the tax against which a credit will be claimed when filing the return; the election is binding. The credit allowed may not exceed 50% of the tax against which it is claimed. Any unused portion of the credit may be carried forward for five years. The carry forwards must be claimed against the same tax. The credit is effective for taxable years beginning on or after January 1, 2007. The federal credit was set to expire December 31, 2007 but was recently extended through August 11, 2111. The North Carolina General Assembly Fiscal Research staff estimates that the newly enacted state WOTC credit will reduce the North Carolina General Fund availability by $3,000,000 for FY07-08 and FY08-09.  The WOTC is designed to help move people from welfare into gainful employment and obtain on-the-job experience. On December 20, 2006, the President signed into law the Tax-Relief and Health Care Act of 2006 (P.L. 109-432). This legislation merged the Welfare-to-Work Tax Credit into the WOTC and extended the WOTC program for a two-year period, through December 31, 2007. The new employee must belong to one of the following nine target groups:  A member of a family that is receiving or recently received Temporary Assistance to Needy Families (TANF) for at least 18 consecutive months ending on the hiring date. A member of a family that is receiving or recently received TANF benefits for any 9-month period during the 18-month period ending on the hiring date. An 18 to 39 year old member of a family that is receiving or recently received food stamps. An 18 to 24 year old resident of one of the federally designated Empowerment Zones (EZ), Enterprise Communities (EC), or Renewal Communities (RC). A 16 to 17 year old EZ/EC/RC resident hired between May 1 and September 15 as a Summer Youth Employee. A veteran who is a member of a family that is receiving or recently received food stamps. A Vocational Rehabilitation Referral who completed or is completing rehabilitation services from a State certified agency, an Employment Network, or the U.S. Department of Veterans Affairs. An ex-felon who has been convicted of a felony and has a hiring date which is not more than one year after the last date on which he was so convicted or released from prison. A recipient of Supplemental Security Income benefits. A new adult employee must work a minimum of 120 or 400 hours and individuals hired as Summer Youth employees must work at least 90 days, between May 1 and September 15, before an employer is eligible to claim the credit. The credit may be as much as $2,400 for each new adult hire, $1,200 for each new Summer Youth hire, and $9,000 for each new long-term family assistance recipient hired over a two-year period. To claim the credit, an employer must seek and receive certification from the IRS that the new employee qualifies the employer for the tax credit. In order to take advantage of the WOTC, the employee must receive an eligibility certification. This can be done by having the employee complete the pre-screening notice, IRS Form 8850. After employees are certified, the credit is to be taken on the employer's annual federal income tax by enclosing IRS Form 5884 with the return. Granted, taking advantage of this tax credit does create additional paperwork. However, it is a credit that can yield large tax credits on your federal return with additional tax savings on your state tax bill. Federal WOTC If your business has not been taking advantage of the federal WOTC, please read this information from the North Carolina Employment Security Commission about  steps to utilizing this valuable tax credit. Back to Top

Tax Measures for Small Businesses Small businesses are important to our economy. This year legislators passed several tax measures to protect our small businesses. These changes will also help us bring more quality high-paying jobs to our state.  Upper-Income Tax Bracket  We decided to allow a temporary income tax increase, put in place during the economic downturn of 2001, to expire. This means that the highest tax rate is now 7.5 percent.  Although this tax rate change affects individual taxpayers, it will be important for small businesses.  Most small businesses are set up as pass-through entities. This means that profits pass through to the owners and are taxed at the rates applicable to the owner instead of at the general corporation rate. Qualified Business Venture Credit  Legislators approved a tax credit for people who invest in certain types of small businesses.  This tax credit will help small businesses because it will help generate outside capital needed for growth.  Internal Revenue Code Update  Every year the state legislature decides if the state should accept changes made in the federal tax code.   One of the big changes in this year’s update involved the amount of property a small business could expense rather than depreciate.  The General Assembly chose to go along with this year’s tax code changes.  These changes will save North Carolina small businesses $36 million in the 2007-08 fiscal year. Tax Credit for Research and Development Expenditures  A few years ago we created a tax credit to encourage businesses to perform qualified research and development activities in North Carolina.  That tax credit is more generous if the taxpayer is a small business.  This session we increased the amount of this tax credit.  REIT Loophole  The General Assembly took steps to close a potential loophole in our corporate income tax laws.  Some large corporations were using real estate investment trusts (REITs) to avoid paying state income taxes.  An REIT is a complicated financial mechanism for holding property used only by large corporations.  We have prevented taxpayers from using REITs to put large businesses and small businesses on a level playing field. It will also assure that all businesses pay their fair share and that the burden of the corporate income tax is not pushed more heavily onto small business.  Disadvantaged Workers  Legislators enacted a work opportunity credit as an add-on to the federal credit as an incentive to businesses that hire disadvantaged workers. Disadvantaged workers include those who are coming off some sort of public assistance, convicted felons, and other groups that find it particularly difficult to find and keep a job.  This tax credit is based on a federal tax credit and allows businesses to offset a portion of the wages paid to a qualified employee.  Health Insurance  Small businesses that provide health insurance to employees are eligible for a tax credit that both lowers the employers’ costs of providing insurance and increases the number of insured people allowed. Business owners who employ 25 or fewer people and pay at least half the premium costs for their workers are eligible for a tax credit for up to $250 a year.  Sales and Use Tax  We changed the tax codes so that small businesses can immediately claim tax credits on property and equipment rather than spread it out over several years. It is estimated that with this plan, small businesses will save $36 million yearly. Other changes in the tax code will provide $21 million in savings. These include tax savings for software publishers, research and development, research supplies, renewable fuel facility construction, and aircraft part makers.  We also changed the process a taxpayer goes through if the taxpayer has a disagreement with the Department of Revenue over the amount of tax due.  This legislation will help simplify the appeals process.  It also gives taxpayers options for independent review in a non-judicial setting outside of the Department of Revenue.  Manufacturers pay tax on manufacturing equipment at a reduced rate (1 percent with a cap of $80 per item) as opposed to the general sales tax rate.  Legislators voted to tax software publishers at this reduced rate.  This will encourage these companies to bring their businesses and more high-paying, quality jobs to North Carolina.  We approved a provision that allows a medical research company to obtain a refund of 50 percent of the sales and use taxes paid on certain types of medical testing supplies.  This will make our state more competitive in attracting jobs in health care.  My colleagues and I have agreed to a phaseout of the sales tax on electricity, the excise tax on piped natural gas, and the privilege tax on other fuels used by manufacturers and farmers. Expected savings are $10 million in the first year and $20 million in the second year. Back to Top

Special 2007 Tax Credit Reminder for Small Businesses The General Assembly passed a law during the 2006 session that offers a health insurance tax credit to small businesses with fewer than 25 employees.  The law set out in House Bill 20 provides a $250 credit if the employer pays at least 50 percent of the health insurance costs of an employee and the employee earns less than $40,000 a year.   The law became effective Jan. 1, 2007, making this tax season the first time businesses can claim the credit. Please be aware of this legislation as you prepare tax returns for small businesses.