Bailey Decision Concerning Federal, State and Local Retirement Benefits

As a result of the North Carolina Supreme Court's decision in Bailey v. State of North Carolina, North Carolina may not tax certain retirement benefits received by retirees (or by beneficiaries of retirees) of the State of North Carolina and its local governments or by the United States government retirees (including military).  The exclusion applies to retirement benefits received from certain defined benefit plans, such as the North Carolina Teachers' and State Employees' Retirement System, the North Carolina Local Governmental Employees' Retirement System, the North Carolina Consolidated Judicial Retirement System, the Federal Employees' Retirement System, or the United States Civil Service Retirement System, if the retiree had five or more years of creditable service as of August 12, 1989.  The exclusion also applies to retirement benefits received from the states §401(k) and §457 plans if the retiree had contributed or contracted to contribute to the plan prior to August 12, 1989.  The exclusion does not apply to local government §457 plans or to §403(b) annuity plans.  Benefits from other state, local, and federal retirement plans may or may not be excluded depending on rulings in the Bailey case.  The exclusion does not apply to retirement benefits paid to former teachers and state employees of other states and their political subdivisions.

A retiree entitled to exclude retirement benefits from North Carolina income tax should claim a deduction on Line 10, Form D-400, Schedule S 2019 Supplemental Schedule, for the amount of excludable retirement benefits included in federal adjusted gross income.  Even if all your retirement is excludable under Bailey, you must still file a North Carolina return if you meet the minimum gross income filing requirements.  A copy of Form 1099-R or Form W-2 received from the payer must be attached to the return to support the deduction.

Income Tax Treatment of a Rollover Distribution to a Roth Account

While a rollover distribution to a traditional IRA is generally not taxable at the time of rollover and the subsequent distributions from the traditional IRA are generally taxable, a rollover distribution to a Roth account is generally taxable at the time of rollover and the subsequent distributions from the Roth account are generally not taxable. If the rollover to a Roth account is from a qualifying tax-exempt Bailey retirement account, the rollover distribution is exempt from State income tax and deductible on the State return to the extent the rollover distribution was included as income on the taxpayer’s federal income tax return. See Directive PD-14-1.