North Carolina retired pay

Is military retirement taxed in North Carolina?

Not taxed

Exempt With 20 Years or Ch. 61.

Yes for most career retirees. Since tax year 2021, North Carolina lets a retiree who served at least 20 years, or was medically retired under 10 U.S.C. Chapter 61, deduct all military retired pay included in federal AGI. A retiree with under 20 years and no Chapter 61 retirement pays North Carolina's flat rate (4.25% for 2025, 3.99% for 2026) unless the Bailey settlement covers the pay.

The law: N.C. Gen. Stat. § 105-153.5(b)(5a)
Current rule since: tax year 2021 for Armed Forces retirees (S.L. 2021-180, s. 42.1A); tax year 2022 for NOAA and Public Health Service retirees (S.L. 2022-74, s. 42.1)
Where you claim it: Form D-400 Schedule S, Part B, Line 21 on the 2025 form (Line 20 is the separate Bailey settlement deduction)

Read on North Carolina’s own sources October 9, 2026

What North Carolina’s rule is worth on your retired pay

Enter your annual taxable retired pay (box 2a of your DFAS or Coast Guard 1099-R). The rate starts at North Carolina’s flat 3.99% rate for tax year 2026; change it to your own bracket if you know it.

One rate applied to the whole amount, not North Carolina’s full return: brackets, other income, deductions and credits change the real figure. Use it to compare, then check the state’s own form instructions.

How it works in North Carolina

Pick the right line first. On the 2025 Schedule S, Part B, Line 21 is the deduction for uniformed services retirees with at least 20 years of service or a Chapter 61 medical retirement. Line 20 is the Bailey settlement deduction for federal, state and local retirees who had five or more years of creditable service as of August 12, 1989. The same dollars cannot go on both lines.

Send proof with the return. The 2025 D-401 lists a DD-214, 1099-R or similar official document showing proof of service for anyone claiming the Line 21 deduction. Enter the taxable retired pay from your federal return; the deduction reaches only payments included in federal adjusted gross income.

Count service the federal way. NCDOR's May 2, 2022 notice says length of service is determined under Title 10 of the U.S. Code, and that a Chapter 61 medical retiree qualifies at any length of service. Disability severance pay is not retired pay and is not deductible. Civil service annuities that include bought-back military time do not qualify either.

If you paid North Carolina tax on qualifying retired pay in an earlier year, file a corrected Form D-400 with the amended circle filled in, plus Form D-400 Schedule AM. A refund needs the amended return within three years from the original due date or two years from payment, whichever is later. As of October 2026, that general window has closed for 2021 and remains open for 2023 through 2025. For 2022 it is closed too unless you filed under a valid extension: the D-401 then counts the three years from the extended due date, which keeps 2022 open only until mid-October 2026.

On an assumed $36,000 pension, the deduction saves $1,530 for 2025 at the flat 4.25% rate and about $1,436 for 2026 at 3.99%. An assumed retiree with 15 years of service and a non-medical early retirement does not meet either test and owes those amounts on the same pension, unless Bailey applies.

Survivor Benefit Plan annuities

Deductible in full when the retiree qualified. G.S. 105-153.5(b)(5a)b. covers Survivor Benefit Plan payments to a beneficiary of a retired member who served at least 20 years or was medically retired under Chapter 61, and the 2025 D-401 puts them on the same Schedule S line as retired pay.

Active-duty pay in North Carolina

Taxed. A North Carolina legal resident serving in the Armed Forces must file a North Carolina return and have state tax withheld wherever stationed, and the 2025 Schedule S deduction list (Lines 17 to 41) has no line for active-duty pay.

Missed it in an earlier year?

To receive a refund, the return must be filed within three years from the date it was due or within two years after the tax was paid, whichever is later (2025 D-401). Amend with Form D-400 Schedule AM.

What trips North Carolina retirees up

NCDOR's Military Retirement page dates the deduction to taxable years beginning on or after January 1, 2022. That date belongs to S.L. 2022-74, which extended it to NOAA and Public Health Service retirees. For Armed Forces retirees the deduction began with tax year 2021 under S.L. 2021-180, as the legislature's summary and NCDOR's own May 2, 2022 notice say.
A former spouse's court-ordered share does not qualify. NCDOR's 2022 notice says the deduction is limited to payments made to the retired member, so a former spouse who receives part of the retired pay is taxed on it.
The line number moved. NCDOR's 2022 notice told 2021 filers to use Schedule S line 20; on the 2025 form the military line is 21 and line 20 is Bailey. Use the instructions for the year you are filing or amending.
NCDOR's 2022 notice says Thrift Savings Plan payments to an eligible retiree qualify (FAQ A12) but TSP payments to a beneficiary do not (FAQ B4). The statute itself names retired pay and SBP only, so confirm with NCDOR before deducting TSP withdrawals.

Federal side: DFAS reports retired pay on Form 1099-R, and the IRS taxes it as a pension. VA disability compensation is not taxable income under federal law (IRS Publication 525). The SCRA’s tax-home rule (50 U.S.C. § 4001) protects servicemembers on orders, not retirees, so where a retiree lives decides which state taxes the pension. Compare every state on the 51-state ledger. North Carolina’s other servicemember protections are on the North Carolina SCRA page.

Frequently asked questions

Does North Carolina tax military retirement?

Not for most career retirees. G.S. 105-153.5(b)(5a) lets a retiree who served at least 20 years in the uniformed services, or was medically retired under 10 U.S.C. Chapter 61, deduct all retired pay included in federal AGI. The 2025 D-401 instructions put the deduction on Form D-400 Schedule S, Line 21. Retirees who meet neither test pay the flat rate, 4.25% for 2025 and 3.99% for 2026, unless the Bailey settlement covers them because they had five years of creditable service by August 12, 1989.

Is SBP taxed in North Carolina?

Not if the retiree qualified. G.S. 105-153.5(b)(5a)b. lets a beneficiary deduct Survivor Benefit Plan payments when the retired member served at least 20 years or was medically retired under Chapter 61. NCDOR's May 2, 2022 notice confirms the SBP deduction started with tax year 2021, and the 2025 D-401 puts it on Schedule S, Line 21 with retired pay. If the retiree had fewer than 20 years and no Chapter 61 retirement, the annuity is taxed.

I have less than 20 years. Is my North Carolina military retirement taxed?

Usually yes, unless you were medically retired. NCDOR's 2022 notice says a Chapter 61 medical retiree qualifies regardless of length of service, but a non-medical retiree needs at least 20 years under Title 10. Disability severance pay never qualifies. One other route exists: the Bailey settlement deduction on Schedule S, Line 20 covers federal retirees, military included, who had five or more years of creditable service as of August 12, 1989, per the 2025 D-401.

Can I amend an old North Carolina return for the military retirement deduction?

Yes, inside the refund window. The 2025 D-401 says a refund requires the return within three years from its due date or two years after the tax was paid, whichever is later. File a corrected Form D-400 with the amended circle filled in and Form D-400 Schedule AM. The deduction exists for tax year 2021 and later, but as of October 2026 the general window has closed for 2021 and for 2022, except that a 2022 return filed under a valid extension stays open until mid-October 2026. For most retirees, 2023 is the oldest year left to fix.

Sources, read October 9, 2026

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