Federal, state tax changes to hit NC taxpayers in 2026

North Carolina taxpayers are set to experience a significant shift in the tax landscape for 2026, driven by new federal legislation and key adjustments at the state level.

The “One Big Beautiful Bill” (OBBB), signed into law by President Donald Trump in July, contains numerous adjustments to federal tax policy. To assist taxpayers in navigating the changes, the US Internal Revenue Service announced an updated online tax withholding tool on March 12.  The tool is designed to help taxpayers accurately determine their tax liability and adjust withholdings.

According to the IRS, the calculator includes a range of new OBBB-related provisions.

“In addition to factoring in no tax on tips and no tax on overtime, the tool precisely accounts for other OBBB modifications tied to family-related credits, homeownership, and charitable giving, along with new deductions like no tax on car loan interest and enhanced deductions for seniors,” the IRS stated in a recent press release.

The IRS recommends the calculator for taxpayers whose financial situations have changed recently or those who stand to benefit the most from the OBBB’s provisions. That includes taxpayers with complex financial situations, recent major life changes, specific tax credits or itemized deductions, income without automatic withholding, or a history of unexpected tax bills or large refunds.

“Any time there are major tax changes, there’s bound to be some confusion for taxpayers trying to understand what applies to them,” said Joseph Harris, fiscal policy analyst for the John Locke Foundation. “That’s especially true at the federal level with a package this large. The purpose of the updated IRS tool is to help people cut through that uncertainty by estimating their tax liability and adjusting their withholding accordingly.”

The specific federal changes for 2026 include:

• Tip income: No federal tax will be levied on up to $25,000 in income earned from tips.

• Overtime pay: Qualified overtime pay will be exempt from federal tax, deductible up to $12,500 for single filers and $25,000 for those married filing jointly. This relief specifically targets the premium portion of pay exceeding the regular rate.

• Auto loan interest: Interest paid on auto loans for certain US-assembled vehicles will be deductible up to $10,000 annually.

• Senior deduction: Seniors aged 65 and older can claim an additional deduction of $6,000 for single filers or $12,000 for married couples filing jointly.

• Charitable contributions: Taxpayers who do not itemize deductions will still be able to deduct up to $2,000 in charitable contributions.

At the state level, the North Carolina tax code is also undergoing changes for 2026, largely reducing the tax burden on filers. The flat income tax rate drops from 4.25% to 3.99%, while the standard deduction increases from $12,750 to $13,000 for single filers and from $25,550 to $26,000 for filers who are married filing jointly.

Additionally, the corporate tax rate dips from 2.25% in 2025 to 2% in 2026, on its way to an eventual phase out by 2030. For the franchise tax, the rate remains $1.50 per $1,000 of the tax base, but a $500 cap applies to the first $1 million of the tax base.

“North Carolina’s personal income tax rate is now 3.99% in 2026 and could drop to 3.49% in 2027 if revenue targets are met this fiscal year, with further reductions to 2.49% possible in later years if those benchmarks continue to be satisfied,” Harris said.

Importantly, North Carolina has not yet adopted several of the new federal tax deductions available for 2026, including the deduction for tax on tips, deduction for qualified overtime, deduction for personal auto loan interest, and the additional deduction for seniors.

“Federal, state tax changes to hit NC taxpayers in 2026” was originally published on www.carolinajournal.com.