Budget-conscious seniors know that taxes can take a big bite out of your retirement budget. As you consider different retirement spots, compare tax codes in each locale to determine how much of your nest egg you'll have to pay the government each year. Some states, such as North Carolina, offer special tax breaks for military retirement income that can leave more room in your budget for other expenses.
Military Retirement Exemption
The North Carolina Department of Revenue allows many retirees who receive military retirement income to exclude some or all of these benefits from reported income for tax purposes. If you have five years of service before Aug. 12, 1989, the state allows you to exclude all military retirement income using line 47 of Form D-400. If you do not have five years of service before Aug. 12, 1989, you can still exclude $4,000 using line 48 of this form. If your spouse also receives a military pension and you file a joint return, you can each exclude $4,000 of this income.
If you are a veteran who receives military disability retirement pay, the state does not require you to include this money as income for tax purposes, reports the Military.com website.
North Carolina State Taxes
Individual income tax rates in North Carolina range from 6 percent to 7.75 percent. While the state excludes Social Security income from state taxes, retirees who choose to work during retirement or who receive other types of income could owe state taxes on these funds. Single taxpayers with a taxable income less than $12,750 pay taxes amounting to 6 percent of taxable income as of 2013. A taxable income of $12,750 to $60,000 requires a tax payment of $765 plus 7 percent of taxable income over $12,750. Those earning more than $60,000 must pay $4,072.50 plus 7.75 percent of taxable income over $60,000. Married filers with taxable income below $21,250 pay a flat 6 percent tax rate. Those with taxable income between $21,250 and $100,000 pay $1,275 plus 7 percent of taxable income over $21,250. Married taxpayers who earn more than $100,000 pay $6,787.50 plus 7.75 percent of the amount over $100,000 as of 2013.
Federal Taxes on Military Pensions
The Internal Revenue Service includes military retirement income as a form of income for tax purposes. That means you are required to include these funds in your income using lines 16a and 16b of Form 1040 or lines 12a and 12b of Form 1040A. You are also required to pay federal taxes on these funds. The Defense Finance and Accounting Service sends pension recipients a 1099-R form by Jan. 25 each year. This document shows how much military retirement income the retiree has received, along with any taxes withheld from this amount.
Other North Carolina Taxes
In addition to income tax, North Carolina residents are subject to several other types of taxes that could influence where retirees choose to live. The state has a 4.75 percent sales tax as of 2013, though local municipalities tack an average of 2.12 percent on top of this figure. While property taxes vary throughout the state, the Tax Foundation reveals that North Carolina collected an average of $902 per capita in property taxes in 2010. North Carolina residents pay no inheritance tax, and the state only charges an estate tax on estates valued over $5.12 million as of 2013.
- Military.com: State Retirement Income Tax
- H&R Block: I'm Retired Military -- Is My Income Tax-exempt for My North Carolina State Taxes?
- North Carolina Department of Revenue: Tax Rate Schedule for Tax Years 2011 and 2012
- Internal Revenue Service: Wages, Salaries, and Other Earnings
- Kiplinger: North Carolina
- Tax Foundation: North Carolina
- Military.com: North Carolina State Veteran's Benefits
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