Retirement Benefits Deduction

Retirement benefits are amounts paid by an employer to a former employee or beneficiary after the employment ends as required under a written retirement plan. Retirement benefits also include amounts you received from an individual retirement account or from an individual retirement annuity (IRA). North Carolina does not tax all of your retirement.

If you received retirement benefits as a former employee of the State of North Carolina or any of its local governments or as a former employee of the federal government and you did not have five years of service with the government as of August 12, 1989, you may deduct the amount included in federal adjusted gross income or $4,000, whichever is less. This deduction also applies to retirement benefits paid to former teachers and state employees of other states and their political subdivisions regardless of the five year service date. If you are married filing jointly and both you and your spouse received federal, state, or local government retirement benefits, you may each deduct up to a maximum of $4,000 for a total of $8,000.

If your federal adjusted gross income includes retirement benefits from a private retirement plan, you may be able to deduct up to $2,000. If you received retirement benefits from more than one private retirement plan, you will not get a separate $2,000 deduction for each distribution. You may deduct only the total amount included in federal adjusted gross income or $2,000, whichever is less. If you received both government and private retirement benefits, your maximum deduction is the total amount included in federal adjusted gross income or $4,000, whichever is less.

An individual is not required to have ceased employment to qualify for the $2,000 deduction for distributions from an individual retirement account or an individual retirement annuity.

If your employer has a structure change and you receive a retirement distribution but do not cease employment with that employer, you do not qualify for the retirement benefits deduction. For example, if company A merged with company B and you continue to work with the merged company, you may not claim a retirement benefits deduction on your State return because you never ceased employment.

The deduction for retirement benefits is allowed only to the extent the benefits are included in federal adjusted gross income. If you elect to roll-over distributions from your retirement plan, you may not take a deduction on your North Carolina return because the distributions are not included in your federal adjusted gross income.

If you included retirement benefits in federal adjusted gross income, complete the Retirement Benefits Worksheet in the instructions for Form D-400. Enter the result on the applicable line on page 3 of Form D-400. The deduction will reduce your North Carolina taxable income.

Include your 1099Rs with your North Carolina tax return when claiming this deduction.

For tax years beginning on or after January 1, 2014, this deduction is no longer available.