How to File Your North Carolina Tax Return for 2020: Step-by-Step Guide for Individuals and Small Businesses

Filing your North Carolina taxes for the 2020 tax year requires understanding specific state requirements that differ significantly from your federal tax return. North Carolina taxpayers must navigate unique state regulations while calculating their adjusted gross income, applying for eligible exemptions, and determining their final tax rate. The North Carolina Department of Revenue implemented several changes for 2020, including adjusted income limits and special provisions related to retirement plan distributions that directly impact how much tax you may owe.

The 2020 tax year presented unprecedented challenges for taxpayers due to COVID-19 relief measures, extended deadlines, and changes to estate tax regulations. Whether you qualify for free help through volunteer programs or need to pay for professional assistance, understanding North Carolina's tax system helps you determine which deductions and credits apply to your situation. Each element affects your overall tax liability and potential refund status, from sales tax considerations to property tax adjustments.

Completing your North Carolina return requires gathering proper documentation, calculating your correct tax rate based on income thresholds, and ensuring you claim all eligible exemptions. Veterans, county residents, and those with specific retirement plan contributions may qualify for additional benefits, while understanding percentage-based calculations helps you determine the exact amount you need to pay. This comprehensive guide provides the details necessary to file accurately and avoid common mistakes that could delay your refund or result in additional taxes owed.

Overview of North Carolina State Income Tax for 2020

Who Needs to File in North Carolina

• Resident Filing Requirements: North Carolina residents must file a state tax return if required to file a federal tax return and lived in the state for the entire tax year. The state uses your federal adjusted gross income to calculate your North Carolina tax liability.
• Part-Year Resident Obligations: Individuals who moved to or from North Carolina during 2020 must file as part-year residents if they received income while living there. These taxpayers report their full adjusted gross income but only pay North Carolina taxes on income earned during their residency period.
• Nonresident Filing Requirements: Nonresidents who earned income from North Carolina sources must file a state return regardless of their primary residence. This includes income from North Carolina employment, business operations, or rental property within the state.

Key Deadlines for 2020 Filing

• Extended Filing Deadline: The North Carolina Department of Revenue aligned with federal deadline extensions for the 2020 tax year, moving the original April 15, 2021, deadline to July 15, 2021. This extension gave taxpayers additional time to gather necessary documents during the pandemic.
• Extension Rules and Payment Requirements: Filing an extension gives you additional time until October 15, 2021, to submit your paperwork but does not extend the deadline to pay taxes owed. You must estimate and pay your tax liability by the original July 15 deadline to avoid penalties and interest charges.
• Important Payment Considerations: As part of COVID-19 relief measures, the state waived interest on underpayment of estimated taxes between April 15, 2020, and July 15, 2020. However, standard penalty rates apply to late payments made after July 15, 2021.

Key Changes for 2020

• Increased Standard Deductions: North Carolina raised standard deduction amounts for all filing statuses, with married filing jointly receiving $21,500, head of household receiving $16,125, and single filers receiving $10,750. These increases reduce taxable income for taxpayers who do not itemize deductions.
• New Forms Introduced: The North Carolina Department of Revenue introduced Form D-400 Schedule A for itemized deductions and Form D-400 Schedule PN-1 for part-year residents and nonresidents. These new forms provide more detailed reporting requirements for specific taxpayer situations.
• COVID-19 Relief Provisions: North Carolina did not adopt all federal CARES Act provisions, creating differences between federal and state tax calculations. The $335 Extra Credit Grant payments from North Carolina can be deducted if included in the federal adjusted gross income.
• Modified Deduction Rules: Unlike federal rules allowing charitable contributions up to 100 percent of adjusted gross income, North Carolina limits philanthropic deductions to 60 percent of AGI. Medical and dental expenses exceeding 7.5 percent of federal AGI remain deductible on state returns.
  
  

Required Forms and Schedules

Main Individual Income Tax Form

• Form D-400 Overview: Form D-400 is the primary individual income tax return for North Carolina residents, part-year residents, and nonresidents with state-sourced income. This form mirrors the federal Form 1040 structure, incorporating North Carolina-specific tax calculations and adjustments.
• Federal Integration: The form uses your federal adjusted gross income as the starting point, then applies state-specific additions and deductions to determine your North Carolina taxable income. This approach simplifies filing by building upon your completed federal tax return information.

Common Schedules and Credits

• Schedule S Requirements: Form D-400 Schedule S reports adjustments to federal adjusted gross income, including Part A for additions and Part B for deductions from federal AGI. This schedule handles North Carolina-specific tax items like state bond interest and retirement benefit deductions.
• Schedule A for Itemizing: The new Form D-400 Schedule A allows taxpayers to itemize North Carolina deductions even if they took the standard deduction on their federal return. This flexibility can result in additional tax savings for qualifying taxpayers.
• Schedule PN and PN-1: Part-year residents and nonresidents must file Schedule PN to calculate the portion of income taxable in North Carolina. The supplemental Schedule PN-1 reports specific additions and deductions for these taxpayer categories.
• Schedule D-400TC: This schedule calculates various tax credits available to North Carolina taxpayers, including education credits, historic rehabilitation credits, and other state-specific credit programs. Proper completion ensures you receive all eligible credit benefits.

Additional Forms You May Need

• Extension and Payment Forms: Form D-410 requests an extension of time to file, while Form D-400V serves as a payment voucher when sending separate payments. Form NC-40 handles estimated income tax payments throughout the year.
• Amendment Procedures: Form D-400 Schedule AM processes amended returns when you need to correct previously filed information. Veterans may require additional documentation to claim military-related exemptions and benefits.
  
  

Step-by-Step Instructions for Completing Your North Carolina Return

Gathering Required Documents

• Federal Return Information: Collect your completed federal tax return (Form 1040 or 1040-SR), as North Carolina uses federal adjusted gross income as the foundation for state tax calculations. Ensure all federal forms and schedules are accurate before beginning your state return.
• Income Documentation: Gather all W-2 forms from employers and 1099 forms reporting interest, dividends, retirement plan distributions, and independent contractor income. Include Schedule K-1 forms from partnerships, S corporations, or trusts showing your revenue share.
• Payment Records and Deductions: Compile records of estimated tax payments made to North Carolina throughout the year, along with receipts and documentation for potential deductions and credits. Keep your prior year state tax return available for reference and comparison.

Completing Form D-400

• Enter Personal Information: Enter your name, address, Social Security number, and filing status exactly as they appear on your federal return. Ensure consistency between federal and state returns to avoid processing delays.
• Report Federal Taxable Income: Transfer your federal taxable income from your completed Form 1040 to establish the starting point for North Carolina tax calculations. This figure serves as the foundation for all subsequent state tax computations.
• Calculate State Additions: Complete Schedule S, Part A, to report required additions to federal taxable income, including interest from non-North Carolina municipal bonds and specific CARES Act adjustments. These additions increase your North Carolina taxable income.
• Apply State Deductions: Use Schedule S, Part B, to claim allowable deductions from federal taxable income, such as Social Security benefits, government retirement benefits, and the $335 Extra Credit Grant payment. These deductions reduce your state tax liability.
• Determine Standard or Itemized Deductions: Choose between the North Carolina standard deduction or itemizing using Schedule A, considering that you can itemize on your state return even if you took the standard deduction federally. Calculate both options to determine which provides greater tax savings.
• Calculate North Carolina Taxable Income: Subtract your chosen deduction amount from your adjusted federal taxable income to determine your North Carolina taxable income subject to the state tax rate of 5.25 percent.
• Apply Tax Rate and Credits: Multiply your North Carolina taxable income by the flat tax rate of 5.25 percent, then subtract any eligible tax credits from Schedule D-400TC. This calculation determines your overall income tax obligation to North Carolina.
• Report Withholding and Payments: Enter North Carolina income tax withheld from your W-2 and 1099 forms, plus any estimated tax payments made during the year. Include payments made with extensions or other advance payments.
• Calculate Final Balance: Compare your total tax liability to your total payments to determine whether you owe additional taxes or qualify for a refund. Ensure accuracy in this final calculation to avoid payment issues.

Common Mistakes to Avoid

• Missing North Carolina Adjustments: Taxpayers frequently forget to add back state income tax deductions claimed on federal returns or overlook required adjustments for COVID-19 relief provisions. These omissions can significantly impact your final tax liability and result in incorrect calculations.
• Retirement Benefit Oversights: Government retirees often miss claiming Bailey retirement benefits deductions, which can provide substantial tax savings for qualifying individuals. Veterans should also verify that they claim all available military-related exemptions and benefits.
• Incorrect Charitable Contribution Limits: Remember that North Carolina limits charitable contribution deductions to 60 percent of adjusted gross income, unlike the temporary 100 percent federal limit for 2020. This difference affects taxpayers who made significant philanthropic contributions during the year.
  
  

Filing Your Return

Electronic Filing Options

• NC Free File Program: Taxpayers with adjusted gross income of $72,000 or less may qualify to file federal and state returns at no cost through the Free File Alliance program. This option provides free help with electronic filing and typically results in faster refund processing.
• Commercial Tax Software: Most popular tax preparation software packages support North Carolina returns and offer electronic filing services. The North Carolina Department of Revenue maintains a list of approved software products that ensure accurate state tax calculations.
• Professional Tax Services: Certified public accountants, enrolled agents, and other qualified tax professionals can electronically file your return while providing expert guidance on complex tax situations. This option works well for taxpayers with complicated income sources or unusual deductions.

Paper Filing Instructions

• Form Completion Requirements: Complete all required forms using blue or black ink, never pencil, and ensure both spouses sign joint returns. Attached are copies of W-2s and 1099s showing North Carolina tax withholding and required schedules, in alphabetical order.
• Required Attachments: Include copies of pages 1 and 2 from your federal tax return with your North Carolina filing. Make complete copies of your return and all supporting documents for your records before mailing.
• Mailing Addresses: Send returns expecting refunds to PO Box R, Raleigh, NC 27634-0001, while returns with taxes owed or zero balances go to PO Box 25000, Raleigh, NC 27640-0640. Include Form D-400V if you are making a payment with your return.
  
  

Payment Methods and Deadlines

Payment Options

• Electronic Payment Methods: The North Carolina Department of Revenue accepts online payments through electronic bank transfers at no charge or credit and debit card payments with applicable service fees. Electronic funds withdrawal allows automatic payment when filing your return electronically.
• Traditional Payment Methods: Make checks or money orders payable to "NC Department of Revenue" and include your Social Security number and "2020 D-400" on the memo line. Always include the Form D-400V payment voucher when sending payments separately from your return.
• Payment Plan Options: Taxpayers unable to pay their full tax liability can request an installment payment agreement through the North Carolina Department of Revenue. This option helps eligible individuals avoid more severe collection actions while satisfying their tax obligations.

Avoiding Penalties

• Late Payment Consequences: Late payment penalties equal 0.5 percent per month up to 10 percent of the unpaid tax amount. Late filing penalties reach 5 percent per month up to 25 percent, making timely filing essential even when you cannot pay immediately.
• Interest Charges and Relief: The state applies statutory interest rates to unpaid tax balances, though COVID-19 relief measures waived interest on underpayments between April 15, 2020, and July 15, 2020. Pay your estimated tax liability by the original deadline to minimize additional charges.
  
  

Tracking Refunds and Balances

Using the "Where's My Refund" Tool

• Online Tracking Process: Access the North Carolina Department of Revenue website and select the "Where's My Refund" tool to check your refund status. For security verification, provide your Social Security number, filing status, and expected refund amount.
• Information Requirements: The system requires specific information from your filed return to protect your privacy and prevent unauthorized access. Refund information is not available by phone for security reasons, making the online tool your primary tracking resource.

Processing Timeframes

• Electronic vs. Paper Filing: Electronically filed returns typically process within 2-3 weeks, while paper returns may take 8-12 weeks or longer, depending on complexity and volume. Filing electronically significantly reduces processing time and provides faster access to refunds.
• Factors Causing Delays: Returns filed early in the tax season, those claiming certain tax credits, or returns containing errors or incomplete information may experience processing delays. Identity verification requirements and returns selected for review also extend processing timeframes.

Checking Amended Returns

• Extended Processing Times: Amended returns typically require up to 6 months for processing due to additional review requirements. Use the "Where's My Refund" tool and select options for amended returns or prior-year refund information.
• Customer Service Contact: Contact the North Carolina Department of Revenue Customer Service line for complex amended return situations at 1-877-252-3052. Have your return information and documentation readily available when calling for assistance.
  
  

Final Filing Checklist

• Verify personal information: Make sure your name, address, and Social Security number match what appears on your federal return. Even slight differences can cause processing delays or rejection of your North Carolina return.
  
  
• Confirm your filing status: Ensure your filing status is the same as on your federal return. This prevents mismatches that could result in incorrect tax calculations or processing errors.
  
  
• Check North Carolina withholding and payments: Compare the withholding amounts on your W-2s and 1099s with your payment records. Confirm that estimated tax payments are recorded accurately to avoid unexpected balances due.
  
  
• Attach all required schedules: Include every schedule relevant to your tax situation, such as Schedule S for income adjustments, Schedule A for itemized deductions, and Schedule PN for part-year or nonresident filings. Missing schedules can delay your return or cause the state to reject certain deductions or adjustments.
  
  
• Sign and date your return: Ensure your signature and date are present before submitting. For joint returns, both spouses must sign to make the return valid.
  
  
• For paper filers: Attach copies of all W-2s and 1099s that show North Carolina withholding, and include pages 1 and 2 of your federal return. Use the correct mailing address for your filing type to avoid delivery delays.
  
  
• Track your refund status: Use the state’s “Where’s My Refund” tool to monitor processing progress. Address any notices from the North Carolina Department of Revenue promptly to prevent penalties or delays in your refund.
  
  
• Store your completed tax return: Keep a copy of your return and all supporting documents for at least three years. Having records ensures you can respond quickly to future questions or audits.
  
  
• Adjust withholding or estimated payments: If you had a large refund or balance due this year, consider changing your withholding or estimated tax payments. This can help you better manage cash flow and avoid surprises next tax season.
  
  

Frequently Asked Questions

What if I missed the filing deadline for July 15, 2021?

Submit your North Carolina tax return promptly to avoid penalties and interest. If you are due a refund, you can file late without penalty, but you must claim it within three years. Taxpayers who file late face a 5% monthly penalty up to 25%, a 0.5% monthly late payment penalty up to 10%, and statutory interest on unpaid amounts.

Can I e-file my North Carolina return for free?

Yes, taxpayers with an adjusted gross income of $72,000 or less in 2020 may qualify for free federal and state tax filing through participating companies' NC Free File program. Additionally, many commercial tax software products include North Carolina returns in their basic packages, and some offer free state filing when you purchase federal return preparation. The IRS Free File program also includes free state returns from several participating providers.

What deductions are most commonly missed on NC returns?

The most frequently overlooked deductions include Bailey retirement benefits for eligible government retirees, Social Security benefits included in federal adjusted gross income, and the $335 Extra Credit Grant payment deduction for qualifying recipients. Many taxpayers miss U.S. government interest deductions and miscalculate qualified business income deduction adjustments between federal and state returns. Check that veterans claim all military exemptions and deductions.

How do I request an extension for my NC return?

A federal extension usually grants an extension in North Carolina, so you don't need to request one. To avoid penalties and interest, file Form D-410 and pay your estimated North Carolina taxes by the due date. Remember that an extension only extends the time to file your return, not to pay taxes.

Can I file jointly in NC if I moved mid-year?  

Yes, you should file a joint federal return. In that case, you must also file a joint North Carolina return, regardless of when you moved during the year. If one spouse was a nonresident or part-year resident, complete Form D-400 Schedule PN to properly allocate income between North Carolina and other states. On the North Carolina return, both spouses must report their full federal adjusted gross income and calculate state taxes.

How long should I keep my NC tax records?

Keep North Carolina tax records for three years after filing your return or two years after paying the tax. Keep records for five to seven years for property records, business returns, and potential fraud or substantial underreporting. Employee-related records should be kept for four years, while credit or deduction records should be kept until the statute of limitations expires.

Are 2020 federal stimulus payments taxable in NC?

Federal Economic Impact Payments (stimulus payments) received in 2020 are not taxable for North Carolina income tax purposes since they were not taxable on your federal return either. No adjustment is needed on your North Carolina return for these payments. However, other COVID-19 relief payments, such as unemployment compensation supplements, may have different tax treatment, so review all pandemic-related income carefully when preparing your return.

‍