North Carolina Taxes on Retirement Income

The flat 3.99 percent rate

North Carolina charges one flat rate on taxable income, not graduated brackets. For tax years beginning after 2025 the rate is 3.99 percent. Before the rate applies, you subtract the North Carolina standard deduction, $12,750 for single filers or $25,500 for married couples filing jointly, or your North Carolina itemized deductions. North Carolina starts from your federal adjusted gross income, then applies its own additions and subtractions.

Social Security is not taxed by North Carolina

Social Security benefits are fully exempt from North Carolina income tax, whatever your other income. If Social Security was included in your federal adjusted gross income, you subtract the full amount on your state return. Railroad retirement benefits get the same treatment. That is a real difference from the federal return, where up to 85 percent of Social Security can be taxable.

The Bailey settlement, and who it covers

The Bailey settlement, from the North Carolina Supreme Court decision in Bailey v. State of North Carolina, exempts retirement benefits for certain government retirees. It covers retirees of North Carolina state and local government systems and federal civilian and military systems, including the Teachers' and State Employees' Retirement System and the federal Civil Service and Federal Employees' Retirement Systems, if they had five or more years of creditable service as of August 12, 1989. Military retirement pay is also fully exempt for retirees with 20 or more years of service or a medical retirement. Private pensions, 401(k) distributions, and IRA withdrawals outside Bailey are taxed at 3.99 percent.

What a typical retiree pays

Take a single retiree with $40,000 of 401(k) withdrawals and $24,000 of Social Security. North Carolina subtracts the $24,000 of Social Security entirely, leaving $40,000, then subtracts the $12,750 standard deduction, leaving $27,250 of taxable income. At 3.99 percent the state tax is $1,087. A Bailey-covered retiree with the same numbers would owe nothing on the pension itself. This is educational information, not tax advice. Confirm your own figures with the North Carolina Department of Revenue or a tax professional.

Your records checklist

1. Subtract your full Social Security amount from federal AGI on the state return.
2. Check whether your pension qualifies under the Bailey settlement.
3. Use the North Carolina standard deduction, $12,750 single or $25,500 joint, not the federal one.
4. Remember the rate is 3.99 percent for 2026, down from 4.25 percent in 2025.
5. Ask a tax professional before assuming any retirement income is exempt.

Common questions

Does North Carolina tax Social Security?

No. Social Security benefits are fully exempt from North Carolina income tax. Subtract the full amount included in your federal AGI on your state return.

What is the Bailey settlement?

A court settlement that exempts retirement benefits for certain state, local, and federal government retirees who had five or more years of creditable service as of August 12, 1989.

Do I pay North Carolina tax on a 401(k) withdrawal?

Generally yes, at the flat 3.99 percent rate for 2026, after the standard deduction. The exceptions are Bailey-covered pensions and qualifying military retirement pay.

Sources and current instructions

Check the tax year and any later updates before acting. These are the primary sources used for this guide.

• SSA: Income taxes and Social Security
• IRS: RMD FAQs