North Carolina does not tax most pension income, but the rules depend on when you retired and what type of pension you receive.

North Carolina excludes most private and government pensions from state income tax. If you receive a pension from your employer, a union, or a government job, you typically pay no state tax on that money. The main exception is if you retired before January 1, 2021 — those pensions are taxed, but only up to a certain amount per year. Military pensions have their own rules and are generally excluded regardless of retirement date.

Federal income tax still applies to most pensions, so you will owe money to the IRS even if North Carolina takes nothing. Social Security benefits have different treatment and are not covered by this pension exclusion. If you receive both a pension and Social Security, you need to understand how each is taxed separately.

Key Takeaways

  • Pensions from private employers, government jobs, and the military are excluded from North Carolina state income tax if you retired on or after January 1, 2021.
  • If you retired before January 1, 2021, your pension is taxable in North Carolina, but you can exclude up to $35,000 per year (the amount does not change year to year).
  • Federal income tax applies to most pensions regardless of your retirement date, so you will still owe the IRS.
  • North Carolina does not tax military pensions at any time, even if you retired before 2021.

Pensions Retired After January 1, 2021: Full Exclusion

If you retired on or after January 1, 2021, your pension income is not subject to North Carolina state income tax. This applies to pensions from private employers, state and local government jobs, and federal civilian employment. The exclusion is complete — you report the income on your North Carolina tax return, but you subtract it as a deduction and owe nothing to the state.

This rule does not mean you owe no tax at all. You still file a federal return and pay federal income tax on the pension. North Carolina simply does not take a state share. If you have other income — such as interest, dividends, or part-time work — you pay state tax on that income as usual.

Pensions Retired Before January 1, 2021: The $35,000 Exclusion

If you retired before January 1, 2021, your pension is taxable in North Carolina, but you can exclude up to $35,000 per year. This means if your annual pension is $40,000, you pay state tax on only $5,000. If your pension is $30,000, you pay state tax on nothing because the entire amount falls within the exclusion.

The $35,000 limit does not increase with inflation or cost of living. It has remained $35,000 since the rule was created and does not change from year to year. If you have a spouse who also receives a pension from before 2021, each of you gets your own $35,000 exclusion — you do not share one combined limit.

You claim this exclusion on your North Carolina tax return using Form NC-1040 or the equivalent form for your filing status. You will need your 1099-R or pension statement showing the gross amount paid to you during the year.

Military Pensions: No Tax at Any Time

Military pensions are treated differently than civilian pensions. If you are a retired member of the U.S. Army, Navy, Air Force, Marine Corps, Coast Guard, or Space Force, your military pension is excluded from North Carolina state income tax regardless of when you retired. This applies whether you retired in 1990 or 2024.

The military pension exclusion is complete and unlimited — there is no cap like the $35,000 limit for pre-2021 civilian pensions. You still owe federal income tax on the military pension, but North Carolina takes nothing. If you also receive a civilian pension, the military portion is always excluded, and the civilian portion follows the rules above based on your retirement date.

How to Report Your Pension on Your North Carolina Return

You report pension income on your North Carolina tax return the same way you report it federally. Your pension provider sends you a Form 1099-R in January showing the gross amount paid during the previous year. You enter this amount on your state return.

If you retired after January 1, 2021, you then subtract the entire pension amount as a deduction. If you retired before 2021, you subtract only $35,000 (or the full amount if it is less than $35,000). The result is your taxable pension income for North Carolina purposes.

You do not need to submit extra forms or documentation with your return unless you are claiming the military pension exclusion and want to ensure the state has clear notice. Many filers simply enter the deduction on the main return. If you use tax software, it typically walks you through the pension deduction based on your retirement date.

Federal Tax Still Applies to Your Pension

North Carolina's pension exclusion does not affect your federal tax obligation. The IRS taxes most pensions as ordinary income. You will receive a Form 1099-R from your pension provider, and you report that income on your federal return (usually Form 1040). You cannot exclude it just because North Carolina does not tax it.

You can request that your pension provider withhold federal income tax from each payment, which reduces the amount you receive but also reduces what you owe when you file. If you do not have withholding set up and owe a large amount at tax time, you may need to make quarterly estimated tax payments to the IRS to avoid penalties.

Social Security and Other Retirement Income

Social Security benefits are not covered by North Carolina's pension exclusion. However, North Carolina also does not tax Social Security income — it is excluded under a separate rule. This means if your only retirement income is Social Security, you owe no North Carolina state tax.

If you have both a pension and Social Security, each is treated separately. Your pension follows the rules above (excluded if retired after 2021, or up to $35,000 excluded if retired before 2021). Your Social Security is always excluded. Other retirement income — such as distributions from an IRA, 401(k), or taxable investment accounts — is taxed as ordinary income by North Carolina unless it qualifies for another exclusion.

Frequently Asked Questions

Do I have to file a North Carolina tax return if my only income is a pension?

If your only income is a pension and you retired after January 1, 2021, you have no North Carolina taxable income, so you do not have to file a state return. If you retired before 2021 and your pension is less than $35,000, you also have no taxable income and do not have to file. However, if you have other income or your pre-2021 pension exceeds $35,000, you must file.

What if I moved to North Carolina after I retired?

North Carolina taxes based on your retirement date, not when you moved to the state. If you retired after January 1, 2021 and then moved to North Carolina, your pension is still excluded. If you retired before 2021, the $35,000 exclusion applies even if you just arrived in the state.

Can I claim the pension exclusion if I retired from a job outside North Carolina?

Yes. The exclusion applies to pensions from employers anywhere in the United States. It does not matter if you worked in another state — if you retired after January 1, 2021, your pension is excluded from North Carolina tax.

Does my spouse's pension affect my exclusion?

No. Each person who receives a pension has their own exclusion. If you and your spouse both retired before 2021, you each get to exclude $35,000. The exclusions do not combine or reduce each other.

What if I have a pension and I am still working?

Your pension is treated the same way regardless of whether you have other income. If you retired after 2021, it is excluded. If you retired before 2021, you exclude up to $35,000. Your wages from current work are taxed normally by North Carolina.