You are partially correct. Retirees with at least 5 years creditable service as of August 12, 1989 are exempt from state income tax on their military retirement pay, due to the Bailey Decision. All other retirees qualified for the $4,000 (or $8,000) exclusion until 2013, when the provision was eliminated.
If you qualify under Bailey, Turbo Tax will ask you about the Bailey
Law for North Carolina in the Federal Taxes
section, when entering your retirement income.
After entering the data from your
1099-R for your retired military pay, there will be several follow-up
questions. Look for a page titled "Where is this distribution
from?" The software will automatically have
"None of the above" checked. Check the first item, "Bailey
settlement retirement benefits", then 'Continue'. At this point,
you should see your NC Tax Due drop to reflect the non-taxability of the
1099-R.
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