North Carolina generally taxes most retirement income, including private pension income and distributions from retirement accounts such as traditional IRAs and 401(k) plans. Retirement income that is included in federal taxable income is generally taxable to North Carolina unless a specific North Carolina subtraction applies. 

Retirement Income Generally Taxable in North Carolina

The following types of retirement income are generally taxable by North Carolina when included in federal taxable income:

• Private pension income
• Traditional IRA distributions
• 401(k) distributions
• 403(b) distributions
• Annuity income (unless otherwise excluded)
• Other employer-sponsored retirement plan distributions

Important: Not all government retirement benefits qualify for a North Carolina subtraction. Taxpayers must meet the requirements discussed below. 

Bailey Settlement Retirement Deduction

Certain retirement benefits may qualify for a North Carolina subtraction as a result of the Bailey v. State of North Carolina decision. Eligible retirement benefits received by qualified retirees or their beneficiaries may be excluded from North Carolina taxable income. 

Who May Qualify?

In general, taxpayers must have had vested rights in the applicable retirement system as of August 12, 1989 to qualify for the Bailey settlement deduction. Eligibility depends upon the specific retirement system and the taxpayer's circumstances. 

Because Bailey eligibility rules are complex, taxpayers should review their retirement system documentation or consult the North Carolina Department of Revenue guidance if they are uncertain whether they qualify. 

Retirement Systems Commonly Associated With Bailey Eligibility

Retirement benefits from the following systems may qualify if all Bailey requirements are met:

• North Carolina Teachers' and State Employees' Retirement System
• North Carolina Local Governmental Employees' Retirement System
• North Carolina Consolidated Judicial Retirement System
• Federal Employees' Retirement System (for qualifying participants)
• United States Civil Service Retirement System

Important: The Bailey exclusion does not apply to retirement benefits paid by other states or their political subdivisions solely because they are governmental retirement plans. 

Military Retirement Income

Military retirement benefits may receive different North Carolina tax treatment than Bailey-qualified retirement benefits.

Program Entry

To enter retirement income that qualifies for the Bailey settlement subtraction:

Navigation

• State
• Edit (three dots)
• Subtractions from Income
• Enter the amount of taxable retirement benefits qualifying for the Bailey settlement that were included on the federal return
• Continue to save

Additional Information

If retirement income does not qualify for the Bailey settlement deduction or another specific North Carolina subtraction, it is generally taxable by North Carolina to the extent it is included in federal taxable income. 

Taxpayers should retain documentation supporting any Bailey settlement deduction claimed on their North Carolina return.