North Carolina Retirement Taxes: Bailey Settlement & What You Need to Know
Government pension recipients may pay zero state tax under the Bailey Settlement. Here's the complete breakdown for NC retirees.
Key Takeaways
- 1Bailey Settlement exempts certain government pensions from NC state tax
- 2Flat 5.25% income tax rate on other retirement income
- 3Social Security benefits are 100% exempt from state tax
- 4Military pension income is fully exempt
- 5$10,000 deduction for private retirement income (65+)
- 6Property taxes are moderate, with relief programs for seniors
The Bailey Settlement: Government Pension Exemption
The Bailey Settlement (from a 1998 court case) provides significant tax relief for certain government retirees who had 5 years of service by August 12, 1989.
- Federal government retirement (FERS/CSRS vested by 8/12/89)
- State/local government pensions (vested by 8/12/89)
- Military retirement pay (vested by 8/12/89)
- Applies to the pension income, not other retirement accounts
- Both the retiree AND surviving spouse are covered
| Pension Type | Bailey Eligible | Tax Status |
|---|---|---|
| Federal (pre-1989 vested) | Yes | Exempt |
| Federal (post-1989) | No | Taxable at 5.25% |
| NC State/Local (pre-1989) | Yes | Exempt |
| Military (pre-1989) | Yes | Exempt |
| Military (post-1989) | N/A | Now fully exempt regardless |
Who Qualifies?
You must have had 5 years of creditable service in a government retirement system as of August 12, 1989. The pension must be from that specific retirement system.
Other Retirement Income Tax Treatment
Retirement income not covered by Bailey Settlement or military exemption is taxed at NC's flat 5.25% rate, with a deduction for seniors.
- Flat 5.25% rate (lower than many states' graduated rates)
- $10,000 deduction for government retirement income (age 65+)
- 401k and IRA withdrawals taxed at 5.25%
- Private pension income taxed at 5.25%
- Investment income and capital gains taxed at 5.25%
Tax Planning Opportunity
NC's flat 5.25% rate can be advantageous for high-income retirees who would face higher marginal rates in progressive-tax states.
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Property and Sales Taxes
North Carolina has moderate property taxes and a 4.75% state sales tax (plus local additions).
- Homestead Exemption: $25,000 for seniors 65+ with income under $33,800
- Property tax relief circuit breaker for low-income seniors
- No estate or inheritance tax
| Tax Type | Rate | Notes |
|---|---|---|
| Property Tax | 0.77% avg | Varies by county (0.45-1.10%) |
| State Sales Tax | 4.75% | Plus 2-2.75% local |
| Groceries | 2% | Reduced rate on food |
| Prescription Drugs | 0% | Fully exempt |
Best NC Areas for Retirees
North Carolina offers mountain, piedmont, and coastal retirement destinations.
- Asheville: Mountain culture, arts scene, mild summers, higher costs
- Wilmington: Beach living, historic downtown, mild winters
- Pinehurst/Southern Pines: Golf mecca, moderate costs
- Chapel Hill/Durham: Research Triangle healthcare, university culture
- Brevard: Affordable mountain town, "Land of Waterfalls"
- New Bern: Historic coastal town, very affordable
Bailey Settlement Is Specific
The Bailey Settlement only applies to government pension income for those vested by August 12, 1989. If you retired from government after this date, your pension IS taxable at 5.25%. Don't assume exemption without verifying your vesting date.
Moving to NC? Protect Your Home Sale Proceeds
Relocating to North Carolina often means selling your current home and potentially having significant cash to invest. A Gold IRA helps protect this windfall.
- Gold IRA withdrawals taxed at flat 5.25% in NC—same as other income
- Physical gold provides inflation hedge for your nest egg
- Diversification beyond NC real estate investment
- Protection from market volatility in retirement
- Tax-deferred growth until you need the funds
Frequently Asked Questions
1Does North Carolina tax military retirement pay?
No. As of 2021, North Carolina fully exempts military retirement pay from state income tax, regardless of when you served or retired. This applies to all military retirement income.
2What is the Bailey Settlement in North Carolina?
The Bailey Settlement is a 1998 court decision that exempts certain government pension income from NC state tax. To qualify, you must have had 5 years of creditable service in a government retirement system by August 12, 1989. Both federal and state/local government pensions can qualify.
3Is North Carolina tax-friendly for retirees?
Moderately yes. NC exempts Social Security and military pensions, offers Bailey Settlement for qualifying government retirees, and has a relatively low flat tax rate of 5.25%. However, 401k/IRA withdrawals and private pensions are fully taxable.
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Social Security: 100% Exempt
North Carolina does not tax Social Security benefits at all. This applies regardless of your total income or filing status.