Does North Carolina tax Federal Retirement or Social Security?

[IreneS · Accepted solution]

No - Social security and railroad retirement benefits are not subject to NC State income tax.

No - Your federal retirement will not be taxed as long as the retiree had "five or more years of creditable service as of August 12, 1989."  [the Bailey Decision]

If you do not fall under the provisions of Bailey v. State of North Carolina decision, your Federal retirement WILL be taxed

[CalCountry]

There are a couple of important exceptions to the exclusion from taxation of retirement income to consider.

See the following citation on the NC Department of Revenue website at:

   https://files.nc.gov/ncdor/documents/files/2018_d-401_instruction_booklet.pdf

"The exclusion does not apply to local government §457 plans or to §403(b) annuity plans. Benefits from other State, local, and federal retirement plans may or may not be excluded depending on rulings in the Bailey case.
The exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and
their political subdivisions."

[Retiree15]

Not sure I understand the 1989 cutoff thing for Federal Annuity taxation.  I started my Federal service as a Civil Servant in 1987, and I am hoping to retire next year; if I moved to NC, would my Federal retirement be taxed?

[xmasbaby0]

https://www.ncdor.gov/taxes-forms/individual-income-tax/bailey-decision-concerning-federal-state-and...

[NCperson]

@Retiree15 - there is someething in NC called "Bailey" and it exempts Federal, State and Local pensions from NC state income tax as long as your pension was vested by August 12,1989, which for most means you must have started your job prior to August 12, 1984 (since most pensions have a 5 year vesting requirement). 

So, in most likelihood, your pension would be TAXABLE in NC.  

[jzotto]

"As a result of the North Carolina Supreme Court's decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local governments or by the United States government retirees (including military).  The exclusion applies to retirement benefits received from certain defined benefit plans, such as the North Carolina Teachers' and State Employees' Retirement System, the North Carolina Local Governmental Employees' Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees' Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989."

I retired in 2011 with over 20 years of creditable service.  Does that mean I do not have to a pay taxes.  The as of August 12, 1989 is confusing.  

[VolvoGirl]

Read NCperson post right above your post.  Sounds like you needed to have 5 years of service credit before August 12, 1989.  When did you start working there?  20 years just takes you back to 1991.  

[jzotto]

hi, thank you for clearing up the issue.  Unfortunately I started my federal career in 1986 so I do not qualify.  

[NCperson]

@jzotto - that august, 1989 date was the date of the North Carolina Supreme Court ruling.  By 'creditable service' is just means you have had to be vested for the pension as of that date.  And since most all pensions vest after 5 years of service, you would have had to begin your job by August 12, 1984 to be eligible under Bailey, meaning NC would not tax your pension.

Now, one other thing to note, beginning in 2021, North Carolina also began exempting US military pensions from NC tax, as long as you had 20 years of service.  A pension from the Federal Government by itself doesn't qualify; it has to be a military pension from the federal government to qualify.   

[jzotto]

Nice sly way to limit the population of retirees eligible for a good deal,  and the break on taxes will end sooner that later.  It would have been nice to just give everyone the same break. At least NC finally gave military retirees as break.

[NCperson]

@jzotto - the State never wanted to provide the tax break.  There was a law suit in the 1980's (we all know it in NC as 'Bailey') which forced the State's hand that local, NC state and federal pensions were not taxable.    But everyone agreed that anyone who's local, NC state or federal pension vested from that date forward would be taxed on their pension in NC.  

Given the military presence in NC (e.g. Camp Lejeune),causing a lot of military retirees to come back to NC, especially the Fayetville area, the legistature passed a law that effective in 2021, military pensions would not be taxable. 

Social Security is not taxed.    

NC is relatively cheap living - I wouldn't knock the lack of this pension tax break as the cost of living more makes up for it.  The state tax rate was dropped from 5.25% to 4.99% in 2022 and is set to step down over the next 4 years until it reaches 3.99% in 2026.  (we have a flat tax rate in NC).  The first $25,100 of income is tax free (standard deduction - filing joint). 

[jzotto]

Thanks for the advice.  I used to live in Vermont where social security, military retirement, government retirement, in fact if you found a penny on the road the state would tax you.  Then the property taxes were sky high so not complaining, now if the price of houses will drop a bit more, I will become a tar heel, never a blue devil.

[TomD8]

Just to clarify:  Vermont does not tax the Social Security income of those whose AGI is $45,000 or less ($60,000 joint).

https://tax.vermont.gov/individuals/income-tax-returns/social-security-exemption

[dms177]

Those retirees filing NC state tax need to read the Bailey Law. One response I read from someone made it sound like only military pensions aren’t taxed by NC and that’s not true.  I am not military and my Federal government annuity is not taxed by NC.  I am under the original retirement program, CSRS, and began working in 1975.