Is military retirement pay taxable in North Carolina?

[108crookedrun]

Is it true?  Retirees 5 years of service as  of Aug.12, 1989 are fully exempt.  For everyone else, military retired pay is taxed, but up to $4000.00 ($8000.00 for married filing jointly) maybe excluded.

[BarbL]

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. 

[SteamTrain]

@TurboTaxBarb
...I'd modify that somewhat.
The last year the 4000,8000 exclusion was applicable was for the 2013 tax years and prior.  For 2014 and beyond..that was eliminated.  So only the Bailey, RR, and SS exclusions remain (There's also a Faulkenbury settlement that "might" remain, but (in my opinion) there shouldn't be anyone eligible to claim that anymore:
<a rel="nofollow" target="_blank" href="http://www.dornc.com/incometaxupdates/presentations/retirees.pdf">http://www.dornc.com/incometaxupda...>

___________________________________
 The 4000,8000 exclusion was only for Public Employee and Federal employee retirement benefits, that were not Bailey eligible,  for tax years of 2013 and before.  There was also a $2000 Retirement income exclusion for the rest of us with pensions from private companies (IBM, AT&T, Ford, Deere...etc)  but those exclusions were eliminated for 2014 going forward.

So anyone who missed the exclusions for 2012 and 2013 tax years could amend NC...

[BarbL]

Thank you.  I was just re-checking that and found conflicting information, your explanation clarifies it.

[bg-misanthrope]

NC House Bill 103 went into effect in 2017 and changes this answer.  Flagged for review.

[bg-misanthrope]

My mistake, it became SB153 and has NOT been signed into law yet.

[SteamTrain]

@bg.misanthrope   I agree that this 2-year old post will not always be applicable

........BUT

HB 103 was passed by the NC house in 2017...then it went to committee.

From the following NC status page, it has not been passed by the senate:

<old link no longer valid>

________________________
OF course, they could always tack that into some other  bill I'm not aware of....but another BUT:

The NCDOR is still using the Bailey Settlement,  12 Aug 1989 as the 5-year vesting date in their own literature,
.... and their actual 2017 D-401 PDF instructions for 2017 show the same thing...so I doubt HB-103 has gone thru all the required steps in any other form (yet):

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

[SteamTrain]

Interesting...they move those numbers around...I wonder if they'll update the status on the H103 if it eventually passes, or at least note what bill number it was transferred to.
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In any case, the NCDOR filing instruction will be updated IF..if it ever passes.  

For simplicity's sake I would hope the y change the effective dates too...or a lot of folks end up having to amend their old tax returns.   Though most wouldn't mind if they get a refund as a result....but amending can be a pain in the behind. ...and the software companies will not rewrite their prior year software to allow for amending for that new tax law.  IF the bill passed and was signed today and if retroactive to 2017, at this point in time, a TurboTax 2017 NC software modification to allow for it would be 60% No, 40% yes....and gets worse as time passes into the current season.

[jasessoms1987]

Most of this is really not true. I am retired military and entered service on Oct 1987, but n.c. still does not tax my income every month. I voluntarily with hold some of it to offset other income I get state taxed on. Dont know why because it looks like I dont fall under the bailey act. But when i file taxes and the end of the year. I claim i do because the state never officially taxed any of my monthly pay all year long.

[SteamTrain]

Sorry @jasessoms1987

I don' agree.  NC may not have challenged you yet, but that military retirement income should not be claimed as being "Bailey" eligible.  Just because you have little or no NC withholding set up on your 1099-R is immaterial.

Some day, NC may challenge you on it, but yeah, you might get away with it in the meantime.  Almost anyone can improperly "claim" Bailey on their Military or Federal 1099-R, and get away with it for awhile, But that doesn't make it right.

[bcole9]

Great! Thank you...

[gkanady]

How do I get TurboTax to exclude my military retirement pay from my North Carolina income?

[gkanady]

Great information! Thank you!