Veterans' Tax Exemption Expanded in Bill Clearing NC House

RALEIGH, N.C. — More veterans in North Carolina could exempt their entire military retiree pay from state income taxes in legislation that cleared the House overwhelmingly on Wednesday.

The measure would apply to retirees with at least 20 years of service and cover any benefits to their survivors. It would help boost North Carolina's image as a landing place for armed forces members when they leave the service, bill sponsor Rep. John Szoka of Cumberland County said at a Legislative Building news conference.

Carrying out the measure, approved 100-5 and now heading to the Senate, would cost $50 million in annual tax collections by mid-2026, according to a legislative staff analysis. Szoka predicted the change would result in a positive fiscal outcome as more veterans choose to locate in North Carolina.

Szoka said over 20 states with individual income taxes don't tax veteran retiree pay. The idea has support from veterans' groups and Walter Gaskin, Gov. Roy Cooper's secretary of military and veterans affairs.

Some military pensions already are exempt from North Carolina taxes -- the result of “Bailey settlement” litigation in the 1990s covering both federal and North Carolina government pension systems. That exemption applies to veterans with five years of service before August 1989.

Wednesday's bill covers income not subject to the settlement for those who served at least 20 years.

An income tax overhaul that took effect in 2014 eliminated a $4,000 deduction on military benefits for those not subject to settlement. It was replaced by higher standard deductions for all.