You are correct.  This is entered in the Federal Taxes section, Retirement Income.  After you enter in your 1099-R, you will see two screens.  The first asks if you were a civil servant, which you will answer no.  The next screen will ask about the Bailey Settlement.  You will select this and make sure the correct amount is in the NC pension box.

Here are your screenshots:  

BUT..be very careful..only Military people who were 5-year vested by 12 Aug 1989 can claim it is exempt.  Military retirees must have started their service before 12 Aug of 1984 in order to claim "Bailey".

https://www.ncdor.gov/taxes-forms/individual-income-tax/bailey-decision-concerning-federal-state-and...
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Military people retiring in 2016 would need MORE THAN ~30-31 continuous years of service to claim Bailey exemption.
(~25 years for 2010 retirees)

..thus All those with less service cannot claim Bailey anymore.  I expect that this is a large % of recent retirees with 20-29 years of service.  Only a very, very, few remain for a full 30 years.

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