The Tarheel State is becoming increasingly popular with retirees. One of the reasons is that it does not tax Social Security earnings. Retirees who worked for the state or federal government or had a military career also enjoy favorable pension tax treatment in North Carolina. As of September 2011, the state sales tax is 4.5 percent, and it does not levy an inheritance tax.
Social Security Benefits
If Social Security benefits were taxed on the federal income tax return, you may deduct this amount from the North Carolina individual tax return. This deduction is allowed because the income is already included as federal taxable income and the state does not levy a tax on this income. The deduction either increases any refund or decreases the amount of tax owed. If the Social Security benefits are not included as part of federal taxable income, you cannot make this deduction on the state return.
Military Retirement Tax
North Carolina does not tax military retirement pensions. As of the time of publication, North Carolina permits full exemption for military retirees with a minimum of five years in the service as of August 12, 1989. For others, it allows a deduction of up to $4,000 for individuals and $8,000 for those married and filing jointly.
If you are receiving a pension from a local, state or the federal government, North Carolina allows a minimum of $4,000 in exclusions, depending on length of service and the dates.This includes pensions from other state governments. It allows up to a $2,000 exemption for qualifying private pensions, including individual retirement accounts. North Carolina state retirees with a minimum of five years of service as of August 12, 1989, are exempt from paying state income tax on the retirement pay.
As of September 2011, homeowners aged 65 and up qualify for a homestead exemption up to $25,000 or 50 percent of the home's appraised value. The property must be the permanent residence and occupied by the homeowner to qualify. Homeowners under age 65 are eligible for the exemption if totally disabled. Low-income homeowners may also qualify for the exemption, and the income limit changes each year. All property, including real estate and tangible personal property, is subject to tax and assessed at full appraised value.