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North Carolina State Tax

Does North Carolina tax military retirement pay?

Not if you served 20 years or were medically retired.Then North Carolina lets you deduct all of it. If you meet neither test, it is taxed unless another rule covers it. Across the line, South Carolina lets a resident deduct all of it, at any age.

This page shows what each state does with your retired pay and a survivor's payments.

North Carolina, South Carolina and federal law sourcedChecked November 2026

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How North Carolina's deduction works

North Carolina law lets a retired member of the uniformed services deduct all of their military retirement pay, if they meet one of two tests. A deduction takes that pay out of the income North Carolina taxes.

The first test is at least 20 years in the uniformed services. The second is a medical retirement under 10 U.S.C. Chapter 61, the federal law on retiring for a physical disability. The Department of Revenue says a medical retirement qualifies no matter how long you served. Severance pay from a medical separation does not.

The pay has to be counted on your federal return first. You claim the deduction on Form D-400 Schedule S, line 21, and attach proof of service, like a DD-214 or a 1099-R. The uniformed services include the commissioned corps of the Public Health Service and of the National Oceanic and Atmospheric Administration (NOAA), from the 2022 tax year on.

If you meet neither test, the pay is taxed unless another North Carolina rule covers it. One is the Bailey settlement, from a state Supreme Court case. The Department of Revenue says it covers certain retirement benefits of United States government retirees, including military. It ties this to five or more years of creditable service as of 12 August 1989. You claim it on line 20, and you cannot deduct the same pay on both lines.

If a court order sends part of the retired pay to a former spouse, the Department of Revenue says that share does not qualify. North Carolina limits the deduction for retired pay to payments made to the retired member.

Sources: North Carolina General Statutes, Section 105-153.5 (subsection b, subdivisions 5 and 5a). NC Department of Revenue, Military Retirement. NC Department of Revenue, Important Notice on the military retirement deduction (updated 5 August 2022). NC Department of Revenue, 2025 Form D-401 instructions (Schedule S, lines 20 and 21). NC Department of Revenue, Bailey Decision. All retrieved 3 November 2026.

What The Line Changes

North Carolina or South Carolina

Federal law says a state cannot tax the retirement income of someone who is not its resident and does not keep their legal home there, and that includes military retired pay. Each state uses its own law to decide who its residents are.

So the state where you are a resident decides, not where you served or where you retired from.

You live in North Carolina

North Carolina resident
Military retired pay

All of it deducted, if you meet a test

At least 20 years in the uniformed services, or a medical retirement under Chapter 61. You claim it on Schedule S, line 21.

Fewer than 20 years

Taxed, unless another rule covers it

A medical retirement still qualifies. The Bailey settlement turns on five or more years of creditable service as of 12 August 1989.

A surviving spouse

Deducted, if the retiree met a test

North Carolina's law covers Survivor Benefit Plan payments to a beneficiary of a retired member who served 20 years or was medically retired.

Your other income

Taxed by North Carolina's rules

Social Security benefits taxed on your federal return are deducted in North Carolina.

You live in South Carolina

South Carolina resident
Military retired pay

All of it deducted

At any age, for the part in your South Carolina taxable income. Income with an early withdrawal penalty does not count. You claim it on the SC1040, line p.

Fewer than 20 years

No years test in the law

South Carolina's law says all military retirement income, and sets no length of service.

A surviving spouse

Deducted, the same way as for the retiree

South Carolina applies the deduction to a surviving spouse the way it applied to the deceased spouse. It also counts a retirement benefit plan tied to the deceased spouse's military service.

Your other income

Taxed by South Carolina's rules

Social Security taxed on your federal return is exempt. The military deduction shrinks the retiree's own other retirement deduction and age 65 deduction by the same amount, unless it is taken as a surviving spouse.

So if you served fewer than 20 years and were not medically retired, the two states' rules differ. North Carolina's deduction does not cover you, and South Carolina's law sets no years test.

Every other state sets its own rule. If you are looking across a different state line, ask that state's tax agency how it treats military retired pay.

Sources: 4 U.S. Code 114. North Carolina General Statutes, Section 105-153.5. NC Department of Revenue, 2025 Form D-401 instructions. NC Department of Revenue, Social Security and Railroad Retirement Benefits. South Carolina Code, Sections 12-6-1170 and 12-6-1171. SC Department of Revenue, 2025 SC1040 instructions (line p). SC Department of Revenue, tips for retirees. All retrieved 3 November 2026.

When You Move

Check your state withholding

DFAS, the Defense Finance and Accounting Service, can take state income tax out of your retired pay for one state at a time.

You can start, stop or change it in myPay, or with DD Form 2866. DFAS's table lists both North Carolina and South Carolina as states it can withhold for. If you move across the line, check which state your retired pay is set to.

DFAS says it cannot take state tax out for annuitants. DFAS calls people who get Survivor Benefit Plan payments "SBP annuitants".

This page is about state tax. DFAS says whether some or all of your retired pay is taxed by the federal government depends on your own case. It also says the retiree is not taxed on payments made to a former spouse under a court order its legal office has approved.

Sources: DFAS, How to Start, Stop or Change State Income Tax Withholding from Your Military Retired Pay. DFAS, Taxes. DFAS, Is it Taxable?. All retrieved 3 November 2026.

Before You Buy

What to ask before you choose a side

Ask these before you sign, so the tax is part of the plan.

  1. Which state will I live in, and what does that state's law say makes me a resident?
  2. Did I serve at least 20 years in the uniformed services, or was I medically retired under Chapter 61?
  3. If neither, did I have five or more years of creditable service as of 12 August 1989?
  4. If a court order splits my retired pay, how does each state treat my share and my former spouse's share?
  5. If my spouse would get Survivor Benefit Plan payments, how would each state count them?
  6. Is my state withholding in myPay set to the right state?
  7. What about property and sales taxes? This page covers only income tax.

This page is not legal or tax advice. The North Carolina Department of Revenue and the South Carolina Department of Revenue decide how a return in their state is treated. Ask the Department of Revenue in your state about your own case.

A page can explain the tax rule.Someone who works the North Carolina side can build the move around your retirement date.

Ashley Schaus is a Mission Ready Operator in Moore County and the Fort Bragg corridor who works on military retirement transitions for service members, veterans, and military families. The plan is built backward from the date that cannot change.

See the operator pageHow we verify operators

Last reviewed November 2026 · Maintained by My Military HQ

Common Questions

Questions retirees ask about North Carolina tax

Does North Carolina tax military retirement pay?

Not if you served at least 20 years in the uniformed services or were medically retired under 10 U.S.C. Chapter 61. Then North Carolina lets you deduct all of it, as long as it is counted on your federal return first. If you meet neither test, it is taxed unless another North Carolina rule covers it.

Does North Carolina tax military retirement pay if I served less than 20 years?

Yes, unless you were medically retired under 10 U.S.C. Chapter 61 or another North Carolina rule covers it. North Carolina's Department of Revenue says a medical retirement qualifies no matter how long you served. Severance pay from a medical separation does not qualify if it is on your federal return.

Does South Carolina tax military retirement pay?

South Carolina lets a resident deduct all military retirement income that is in their South Carolina taxable income. The South Carolina Department of Revenue says this is no matter your age. Income with a penalty for an early withdrawal does not count.

What is the Bailey settlement for military retirees in North Carolina?

It comes from a North Carolina Supreme Court case, Bailey v. State. North Carolina's Department of Revenue says the state may not tax certain retirement benefits of United States government retirees, including military. It ties this to five or more years of creditable service as of 12 August 1989. You cannot deduct the same pay under Bailey and under North Carolina's military retirement deduction.

Can a former spouse deduct a share of military retirement pay in North Carolina?

No. North Carolina's Department of Revenue says the deduction for retired pay is only for payments to the retired member, so a former spouse who gets a court-ordered share of the retired pay cannot take it.

Does North Carolina tax a surviving spouse's Survivor Benefit Plan payments?

Not if the retired member served at least 20 years or was medically retired. North Carolina's law lets a beneficiary of that retired member deduct Survivor Benefit Plan payments. In South Carolina, a surviving spouse applies the military retirement deduction the same way it applied to the deceased spouse.

Does North Carolina tax active duty military pay?

Yes, if your legal residence is North Carolina, wherever you are stationed. North Carolina's Department of Revenue says a service member who is a legal resident of another state, and is in North Carolina on military orders, does not pay North Carolina tax on their service pay. Other income they earn in North Carolina is taxed.

How do I change state tax withholding on my military retirement pay?

Use myPay, or send DD Form 2866, says DFAS, the Defense Finance and Accounting Service. DFAS takes out tax for one state at a time, and its table lists both North Carolina and South Carolina as states it can withhold for. DFAS cannot take out state tax for annuitants. If you move, check which state your retired pay is set to.

Sources

Where every fact came from

Everything on this page comes from North Carolina law, South Carolina law, federal law, or the agencies that apply them. Where they do not say something, we left it out.

What we left out on purpose. We give no tax rates, because they change, and we do not say how much you would save, because that depends on your whole return. We cover only income tax, not property or sales tax. We cover only North Carolina and South Carolina, because each other state sets its own rule. We leave out Thrift Savings Plan payments, civil service pensions, VA disability pay and other disability payments: each has its own rule, so ask the state's Department of Revenue. We leave out the terms of the Bailey settlement beyond the date above, North Carolina's rules before the 2021 tax year, South Carolina's rules for Guard and Reserve pay, and the forms for a year you move in or out. If you retired from the Public Health Service or the NOAA commissioned corps and live in South Carolina, ask the South Carolina Department of Revenue. And we leave out bills in either state that have not become law.

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