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.
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 2018
The battle over taxing military retirement pay in North Carolina is not over. A state Senate bill is currently pending that would exempt all military retirement income from state tax – no five years of service before 1989, no $4,000 cap. If you’re considering military retirement in North Carolina, you might want to keep an eye on their Senate Bill 153.
North Carolina’s Senate Bill 153 was House Bill 103 in 2017. It passed in February 2017 and was sent to the Senate. Supporters of this bill say that it’s not fair for some military retirees to get a tax exemption just because they served earlier than others. But the cost of exempting all military pay from state tax is a big hurdle. Estimates are that the state would lose over $22 million just for 2017-18.
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’s 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.
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- 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?
- Creatas/Creatas/Getty Images