Taxes can significantly impact your retirement savings. If you plan to retire in North Carolina, it is crucial to understand how the state taxes retirement income, property, and estates. While some retirees may pay less than expected, others may face unforeseen tax burdens.

Planning ahead can help you optimize your savings. This article discusses how North Carolina taxes retirees and offers information on minimizing your tax liability.

1. Income Taxes for Retirees

1.1 Social Security Benefits

A major advantage for retirees in North Carolina is that the state does not tax Social Security benefits. This can result in a lower tax bill compared to states that do impose such taxes¹.

1.2 Taxation of Other Retirement Income

Other retirement income, including 401(k) withdrawals, IRAs, and pensions, is subject to taxation.

• North Carolina has a flat income tax rate. In 2025, the rate is 4.25%².
• After 2025, the rate will decrease to 3.99%².
• Unlike federal taxes, North Carolina does not use tax brackets; all income is taxed at the same rate.

If you have substantial retirement savings, careful withdrawal planning can help reduce your tax burden.

1.3 The Baily Exemption

Some government retirees may be exempt from state taxes on their pensions under the Bailey Exemption.

To qualify, you must:

• Have five or more years of creditable service in a state, federal, or local government retirement system as of August 12, 1989³.
• Receive a pension from a qualifying government job, such as military service, law enforcement, or teaching³.

If eligible, your entire pension is exempt from North Carolina state income tax.

2. Property Taxes and Retirement

2.1 General Property Tax Rates

North Carolina has relatively low property taxes:

• The average effective property tax rate is 0.73%, lower than the national average of 0.99%⁴.

However, high property values can still lead to substantial tax bills.

2.2 Homestead Exclusion Program

Retirees 65 and older or permanently disabled may qualify for property tax relief:

• If your income is $37,900 or less, you can exclude up to 50% or $25,000 of your home’s value from taxation⁵.

2.3 Circuit Breaker Tax Deferment Program

For lower-income retirees, this program caps property taxes:

• If your income is $55,050 or less, your tax bill is limited to 4% or 5% of your income⁶.
• The remaining property tax is deferred until you sell or transfer your home⁶.

This helps retirees stay in their homes without financial strain.

2.4 Disabled Veteran Property Tax Exclusion

Disabled veterans may qualify for a $45,000 property tax exemption⁷:

• Applies to honorably discharged veterans.
• Extends to surviving spouses of disabled veterans.

This benefit can significantly reduce property tax obligations.

3. Estate and Inheritance Taxes

North Carolina does not impose an estate tax or inheritance tax⁸:

• Heirs do not owe state taxes on inherited money or property.
• Federal estate taxes apply only to estates over $13.99 million in 2025⁹.

For high-net-worth individuals, proper estate planning is crucial to minimizing taxes.

3.1 Importance of Estate Planning

Even though North Carolina does not impose state estate taxes, careful planning is essential to ensure that your assets are distributed according to your wishes while minimizing potential federal tax liabilities. Some strategies to consider include:

• Gifting Assets: Consider giving financial gifts to your heirs during your lifetime to reduce the size of your taxable estate.
• Establishing Trusts: Trusts can help manage and protect assets while potentially reducing estate tax exposure.
• Charitable Contributions: Donating to charity can provide tax benefits while supporting meaningful causes.
• Reviewing Beneficiary Designations: Ensuring that retirement accounts, insurance policies, and investment accounts have updated beneficiary information can prevent unintended tax consequences.

3.2 Inheritance Laws and Probate Considerations

Although there is no inheritance tax, the probate process can still impact the distribution of an estate. Probate can be time-consuming and costly, so some retirees opt to use estate planning tools such as revocable living trusts to bypass probate and ensure a smooth transition of assets to their beneficiaries.

By working with an estate planning attorney and a CERTIFIED FINANCIAL PLANNER^® professional, retirees in North Carolina can maximize their financial legacy while minimizing potential tax obligations.

4. Strategies to Minimize Retirement Taxes in North Carolina

4.1 Tax-Efficient Withdrawal Strategies

The sequence of retirement withdrawals impacts tax liability:

• Withdraw from taxable accounts first.
• Use Roth IRAs and Roth 401(k)s later, as they provide tax-free income.
• Avoid large withdrawals that push you into a higher federal tax bracket¹⁰.

4.2 Utilizing Tax-Advantaged Accounts

• Consider a Roth conversion before taking Social Security.
• Moving funds from a traditional IRA to a Roth IRA allows tax-free growth¹¹.
• This strategy can lower future tax liabilities.

4.3 Estate Planning Tips

Take advantage of North Carolina’s lack of estate taxes to pass down wealth efficiently.
Utilize charitable giving to reduce taxable assets.
Establish a trust to protect assets for heirs¹².

Final Thoughts

Taxes in retirement can be a significant expense without proper planning. While North Carolina provides certain tax benefits for retirees, not all income sources are exempt from taxation. Careful financial preparation is key to maintaining and maximizing your retirement savings.

For a deeper understanding of tax-efficient retirement planning, explore this comprehensive resource on tax strategies for retirement. It covers essential considerations that can help you make informed financial decisions.

Implementing a well-thought-out tax plan can help you retain more of your wealth. Consulting with your CERTIFIED FINANCIAL PLANNER^® professional and your CPA can provide personalized guidance on reducing tax liabilities, protecting your assets, and ensuring long-term financial security.

If you plan to retire in North Carolina, now is the perfect time to take proactive steps. Make sure your financial future is working in your favor, not against you.

Book a discovery call today to explore tailored retirement solutions and secure your financial future before it’s too late.

Sources:

1. https://www.ncdor.gov/
2. https://www.ncdor.gov/taxes-forms/individual-income-tax
3. https://www.ncdor.gov/bailey-decision-concerning-federal-state-and-local-retirement-benefits
4. https://smartasset.com/taxes/north-carolina-property-tax-calculator
5. https://www.ncdor.gov/taxes-forms/property-tax/property-tax-relief-programs
6. https://www.ncdor.gov/taxes-forms/property-tax/property-tax-relief-programs
7. https://www.ncdor.gov/taxes-forms/property-tax/property-tax-relief-programs
8. https://www.ncdor.gov/
9. https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
10. https://www.kiplinger.com/retirement/how-to-make-your-money-last-in-retirement
11. https://www.irs.gov/retirement-plans/roth-iras
12. https://www.forbes.com/advisor/retirement/estate-planning-guide/