The short answer
North Carolina does not tax Social Security benefits: if they were taxed on your federal return, you deduct them on your North Carolina return. Some government pensions are also exempt under the Bailey decision, and many military retirees can deduct their retirement pay. Other retirement income, such as most IRA and 401(k) withdrawals, is generally taxed at North Carolina's flat rate.
Government pensions and the Bailey decision
Under the Bailey decision, North Carolina does not tax retirement benefits from:
- The North Carolina state and local government retirement systems
- The Federal Employees' Retirement System or the Civil Service Retirement System
The exclusion applies if the retiree had five or more years of creditable service as of August 12, 1989. It also covers benefits from the state's 401(k) and 457 plans if the retiree contributed, or contracted to contribute, before August 12, 1989. It does not apply to pensions from other states or their local governments.
Not sure if your pension qualifies? Bring your retirement statements and we'll check.
Related service: Tax Planning in Shelby
Military retirement pay
North Carolina allows a deduction for military retirement pay if the retiree:
- Served at least 20 years in the uniformed services, or
- Was medically retired under 10 U.S.C. Chapter 61
The deduction does not cover severance pay received on separation under Chapter 61.
Other retirement income
Distributions from IRAs, 401(k)s and pensions that don't qualify for an exclusion are generally included in North Carolina taxable income and taxed at the flat rate (3.99% for tax year 2026). Rollovers from a Bailey-protected account keep special treatment in some cases, so check before you move money.
Do you need to file?
If Social Security is your only income, you may not need to file a federal return. A refund is only possible if tax was withheld or you qualify for a refundable credit. Your situation can change with a part-time job, a pension or an IRA withdrawal, so ask us if you're unsure.
Planning ahead
The way retirement income is taxed affects decisions like when to take Social Security, how much to withdraw from an IRA, and how to plan for health and long-term care costs. We can look at your whole picture, including the insurance side.
Official sources
- NCDOR, Social Security and railroad retirement benefits
- NCDOR, Bailey decision concerning federal, state and local retirement benefits
- NCDOR, Military retirement
- NCDOR, Tax rate schedules
- IRS, Check if you need to file a tax return
This guide is general information, not advice for your situation. Tax rules change; check with us or the official source before acting.
Social Security and railroad retirement
If any of your Social Security or railroad retirement benefits were taxed on your federal return, you can deduct those benefits on your North Carolina return. The result: North Carolina doesn't tax them.