If you served in the military for at least five years before Aug. 12, 1989, your military retirement pay is exempt from North Carolina military retirement tax. If you don’t have five years of service before Aug. 12, 1989, you may still be able to exclude $4,000 of your military retirement pay as a single taxpayer and $8,000 if you’re married and filing jointly.
Depending on when you served, all or part of your military retirement pay may be exempt from North Carolina state tax.
NC Military Retirement Tax
Taxing military retirement pay in North Carolina has a long history. The boiled-down version is this: For a long time, military retirees had to pay state income tax on their retirement benefits, as did federal government retirees. However, state and local employees, including teachers, did not. This policy was challenged in 1984 in a case that went all the way to the Supreme Court in 1989. The Supreme Court decided that military and federal government retirees could not be taxed differently than North Carolina state and local retirees.
North Carolina responded by deciding to tax state and local government retirees. All federal, state, local and military retirees had to pay state income tax on benefits of over $4,000 a year. The new policy was challenged and in 1998 the North Carolina Supreme Court ruled that the state could not tax retirement benefits for military, federal, state and local government employees if they were vested in their retirement system as of Aug. 12, 1989. Vested meant that you had to have at least five years of service before Aug.12, 1989. If you didn’t, you had to pay state tax on benefits above $4,000. This is where things stand today.
Exceptions and Allowances
One exception to the tax on non-vested military retirement pay over $4,000 is Veterans Affairs disability retirement pay. This type of military retirement pay is not subject to state or federal income tax. North Carolina also has a program that gives disabled veterans a break on their property tax.
If you were honorably discharged and have a VA-rated disability, you can apply to have the assessed value of your home reduced by $45,000. A surviving spouse of an honorably discharged disabled vet may also qualify if she has not remarried.
Military Retirement Tax Status 2019
The battle over taxing military retirement pay in North Carolina may not be over just yet, but the latest skirmish saw a defeat. State Senate Bill 153 proposed the exemption of all military retirement income from North Carolina state tax -- no five years of service before 1989 and no $4,000 cap. After the Senate passed this bill in February 2017, it was ultimately defeated when the House failed to get on board after the bill sat in a House Committee for almost a year. The bill was killed, so the service vesting and $4,000 cap stands.
Military Retirement Benefits by State
If you’re planning on retiring from the military, it’s a good idea to do an online search of military retirement benefits by state. There are 20 states that don’t tax military pay when it is retirement income. Another nine states do not have personal income tax at all. Then there are 13 states that, like North Carolina, do tax all military retirement pay. The remaining eight states that tax military retirement pay are California, Montana, New Mexico, North Dakota, Rhode Island, Utah, Vermont and Virginia.
File Your North Carolina Return
Instead of receiving a W-2 from an employer in January of each year, military retirees receive a Form 1099-R from the Defense Finance and Accounting Service. The 1099-R lists your gross retirement pay and the amount that’s federally taxable. If you’re entitled to exclude some or all of your military retirement pay from North Carolina state tax, use their Schedule S, Part B – Deductions from Federal Adjusted Gross Income.
Line 10 of this form will be the amount of retirement benefits that can be excluded from state tax. Line 14 is the total amount of deductions from your federal adjusted gross income. This total goes on North Carolina’s Individual Income Tax Form D-400, line 9. Be sure to attach a copy of your 1099-R to the state tax return before submitting it.
- Military Benefits.info: North Carolina Veteran’s Benefits
- Military Benefits.info: States that Do & Don’t Tax Military Retirement Pay
- NCDOR.gov: D-400 Individual Income Tax Return
- NCDOR.gov: Schedule S North Carolina Supplemental Schedule
- North Carolina Center for Public Policy Research.org: AskNC: Why does North Carolina tax the pensions of some military retirees?
- The Fayetteville Observer: Inside Politics - Senator Upset Because Legislature Failed to Pass Tax Break for Veterans
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as Budgeting the Nest, PocketSense and Zacks.