Does North Carolina Tax Military Retirement Pay?
North Carolina lets eligible military retirees deduct their retired pay from state taxable income if they meet specific statutory criteria. Under N.C. Gen. Stat. 105-153.5(b)(5a), you can deduct the full amount received during the taxable year from the United States government for uniformed services retirement pay if you meet either of two requirements: you served at least 20 years in the uniformed services, or you were medically retired under 10 U.S.C. Chapter 61.
The statute sets two qualification tests rather than a blanket exclusion for all military retirees. If your retirement pay does not satisfy the 20-year service test or the Chapter 61 medical retirement test, it falls outside subdivision (5a).
The deduction also extends to survivor benefits tied to an eligible career or medical retirement. Under sub-subdivision (5a)b, payments under a plan defined in 10 U.S.C. 1447, known as the Survivor Benefit Plan, are deductible by a beneficiary if the retired member was eligible to deduct retirement pay under sub-subdivision a. Amounts deducted under subdivision (5a) cannot also be deducted under subdivision (5).
Who Qualifies for the North Carolina Deduction
Qualification under subdivision (5a) depends strictly on whether your military service meets the two criteria defined in North Carolina law. Based on our reading of the statute text on November 12, 2026, the deduction applies only to retirement pay for service in the uniformed services of the United States. For this statute, the definition of uniformed services comes directly from 10 U.S.C. 101(a)(5), which encompasses the armed forces, the commissioned corps of the National Oceanic and Atmospheric Administration, and the commissioned corps of the Public Health Service. Under 10 U.S.C. 101(a)(4), the armed forces are the Army, Navy, Air Force, Marine Corps, Space Force, and Coast Guard.
The statute names no separate rule for Reserve or Guard retirees. Check the 20-year and Chapter 61 tests against your own service record. The table below outlines how North Carolina statute treats specific military payments under N.C. Gen. Stat. 105-153.5(b):
| Military Payment Situation | Deduction Applies? | Statutory Basis |
|---|---|---|
| 20 or more years of service in the uniformed services | Yes | N.C. Gen. Stat. 105-153.5(b)(5a)a Criterion 1 |
| Chapter 61 medical retirement | Yes | N.C. Gen. Stat. 105-153.5(b)(5a)a Criterion 2 |
| Chapter 61 severance pay | No | N.C. Gen. Stat. 105-153.5(b)(5a)a expressly excludes severance pay due to separation under Chapter 61 |
| Fewer than 20 years of service and not medically retired | Not under (5a) | Fails both criteria of subdivision (5a)a, so check whether subdivision (5) applies |
| Survivor Benefit Plan payments to eligible beneficiary | Yes | N.C. Gen. Stat. 105-153.5(b)(5a)b applies to beneficiaries of eligible retirees |
| Retired pay already deducted under subdivision (5) | Cannot deduct under (5a) | N.C. Gen. Stat. 105-153.5(b)(5a) bars taking deductions under both (5) and (5a) |
We read the text of N.C. Gen. Stat. 105-153.5(b) on November 12, 2026, to verify these statutory boundaries. If you receive severance pay due to separation under 10 U.S.C. Chapter 61, the final sentence of sub-subdivision (5a)a explicitly excludes that severance pay from this deduction. Retired pay that meets neither the 20-year service requirement nor the Chapter 61 medical retirement rule cannot be deducted under subdivision (5a).
The Bailey Settlement Subdivision
Under subdivision (5), an individual can deduct the amount received during the taxable year from one or more state, local, or federal government retirement plans to the extent the amount is exempt from tax pursuant to a court order in settlement of specific court cases.
The statute identifies those specific legal actions by name and case number:
- Bailey v. State (92 CVS 10221, 94 CVS 6904, 95 CVS 6625, 95 CVS 8230)
- Emory v. State (98 CVS 0738)
- Patton v. State (95 CVS 04346)
The statute text gives no specific service threshold, calendar date, or individual eligibility formula for subdivision (5) beyond the reference to those court settlements. If your military retired pay falls outside subdivision (5a) because you have fewer than 20 years of service and were not medically retired under Chapter 61, you must check whether your benefits qualify under subdivision (5). However, the law explicitly prohibits double deductions: any amount deducted under subdivision (5a) may not also be deducted under subdivision (5).
What North Carolina Taxes outside the Deduction
Military retired pay that fails to qualify under subdivision (5a) and does not fall under the court-order settlements in subdivision (5) remains part of North Carolina taxable income. Under N.C. Gen. Stat. 105-153.5(b)(3), benefits received under Title II of the Social Security Act and amounts received from retirement annuities or pensions paid under the Railroad Retirement Act of 1937 are deducted from state taxable income. As a result, qualifying Social Security benefits do not increase your North Carolina taxable income alongside military retirement pay.
N.C. Gen. Stat. 105-153.5(b) sets no tax rate. To confirm filing details, you can visit the North Carolina Department of Revenue. Keep in mind that federal taxation operates under separate federal laws. You can calculate your federal obligations using our federal military retirement tax calculator.
Who This Is Not For and What Would Change Our Answer
This deduction applies only to North Carolina personal income tax. Residents of other states, such as South Carolina, follow their own state tax codes. If you establish legal residence outside North Carolina, the statutory provisions of N.C. Gen. Stat. 105-153.5 do not govern your state tax return. To compare other states, see the state-by-state military retirement tax guide.
Income that consists only of Department of Veterans Affairs (VA) disability compensation falls outside this deduction. The statutory provisions in N.C. Gen. Stat. 105-153.5(b)(5a) specifically address retirement pay received from the United States government for service in the uniformed services and Survivor Benefit Plan distributions, not standalone VA compensation.
Our answer would change if the North Carolina General Assembly enacts legislation amending N.C. Gen. Stat. 105-153.5. The statute's history note reflects legislative amendments through Session Laws 2025-4, 2026-11, and 2026-31. Our search of the text of those session laws found none that reprints or amends military retirement subdivision (5a). As of the statute text we read on November 12, 2026, the 20-year service and Chapter 61 medical retirement criteria remain the governing standards.
Our Takeaway
North Carolina's statute lets a retiree with at least 20 years in the uniformed services, or a Chapter 61 medical retirement, deduct military retired pay on the state return. The deduction also covers Survivor Benefit Plan payments distributed to a beneficiary of an eligible retiree. However, Chapter 61 severance pay and retired pay that meets neither the 20-year nor the Chapter 61 test remain outside subdivision (5a).
If your service history does not satisfy either criterion in subdivision (5a), check whether subdivision (5) applies under the court settlements in Bailey, Emory, or Patton. Our findings are grounded in our direct reading of N.C. Gen. Stat. 105-153.5(b) on November 12, 2026. Because state statutes are subject to legislative action, check the current law if new legislation passes. To determine whether your individual situation qualifies, review the statute and confirm the state details with the North Carolina Department of Revenue to see whether North Carolina taxes your military retirement pay on your return.