North Carolina Deductions

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 income 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.

Certain Retirement Benefits Received by a Retired Member of the United States Armed Forces Not Deducted on Line 19.

Effective for taxable years beginning on or after January 1, 2021, a retired member of the United States Armed Forces or their eligible beneficiary may deduct the following payments received from the United States government in 2021:

• Military retirement payments received by a retired member who served at least 20 years in the military or who was medically retired from the military.

Note: The deduction does not apply to severance payments received by a member of the Armed Forces who was separated from the military.

• Payments from the Survivor Benefit Plan to a beneficiary of a retired member who served at least 20 years in the military or who was medically retired from the military.

Important: Military retirees who deducted retirement income on Line 19 under Bailey may not deduct the same retirement income on Line 20.

Bonus Asset Basis.

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.)

Bonus Depreciation.

You may deduct an amount equal to 20% of the bonus depreciation deduction added to federal adjusted gross income on your 2016, 2017, 2018, 2019, and 2020 state tax returns.

IRC Section 179 Expense.

You may deduct an amount equal to 20% of the IRC section 179 expense deduction added to federal adjusted gross income on your 2016, 2017, 2018, 2019, and 2020 state tax returns.

Recognized IRC Section 1400Z-2 Gain.

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 in a prior tax year.

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) 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.

(3) Amount by Which State Basis Exceeds Federal Basis for Property Disposed of in 2021. 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.

(4) Ordinary and Necessary Business Expense Reduced or not Allowed Due to Claiming a Federal Tax Credit in Lieu of a Deduction. You may deduct the amount by which the deduction or an ordinary and necessary business expense was required to be reduced or was not allowed under the Code because you claimed a federal tax credit against your federal income tax liability in lieu of a deduction. This deduction is allowed only to the extent North Carolina does not allow a similar credit for the amount

(5) Personal Education Savings Account Deposits. You may deduct the amount deposited during the taxable year to a personal education savings account (“PESA”) under Article 41 of Chapter 115C of the General Statues to the extent the deposit is included in calculating federal adjusted gross income.  

(6) Certain State Emergency Response and Disaster Relief Reserve Fund Payments. 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.

(7) Certain Economic Incentive Payments. You may deduct the amount received as an economic incentive pursuant to G.S. 143B-437.012 or Part 2G or Part 2H of Article 10 of G.S. 143B to the extent this amount is included in federal adjusted gross income.

(8)Certain N.C. Grant Payments. You may deduct the amount of the Extra Credit Grant or Business Recovery Grant payment you received in tax year 2021 to the extent the payment is included in calculating federal adjusted gross income.

(9) Certain Net Operating Loss Carrybacks. You may deduct an amount equal to 20% of the Net Operating Loss Carryback added to federal adjusted gross income under G.S. 105-153.5(c2) (8), (9), or (10) on your 2013 through 2019 state tax return.

(10) Excess Net Operating Loss Carryforward. You may deduct an amount equal to 20% of the Excess Net Operating Loss Carryforward Deduction added to federal adjusted gross income on your 2019 and 2020 state tax return.

(11) Excess Business Loss. You may deduct an amount equal to 20% of the Excess Business Loss added to federal adjusted gross income on your 2018, 2019, and 2020 state tax return.

(12) Business Interest Limitation. You may deduct an amount equal to 20% of the Business Interest Limitation added to federal adjusted gross income on your 2019 and 2020 state tax return.