Bill would eliminate income tax on military retirement pay

22 states have exempted military retirement pay from state income taxes

Major General James Mingus, commander of the 82nd Airborne Division, welcomes paratroopers home from the Middle East to Fort Bragg, N.C., during a ceremony Thursday, Feb. 20, 2020. Nearly two months after a U.S. Army rapid-response force was activated amid tensions with Iran, deploying 3,000 soldiers to the Middle East, some are returning home. By the end of the weekend, nearly 800 paratroopers from the 82nd Airborne Division’s Immediate Response Force are slated to have returned to Fort Bragg, North Carolina. On Thursday morning, eager family members waited in the base’s iconic Green Ramp to greet their loved ones. (Sarah Blake/U.S. Army via AP)

RALEIGH — A bill moving through the North Carolina House seeks to eliminate state income taxes on the retirement pay for military veterans.

House Bill 83 would allow for military veterans to deduct their military retirement benefits. The deduction would be effective for taxable years beginning on or after Jan. 1, 2021.

The legislation’s primary sponsors are Reps. John Szoka (R-Cumberland), John Bell (R-Wayne), John Bradford (R-Mecklenburg) and Diane Wheatley (R-Cumberland).

“By eliminating the income tax on military retirement pay, we will also make our state more competitive in attracting and recruiting these highly trained and qualified military retirees,” Szoka said in a statement. “This is an essential component to developing and growing North Carolina’s talented workforce.”

The deduction would apply to military retirement pay received by a retired U.S. military member who served at least 20 years or was medically retired. Additionally, the bill includes payments from the Survivor Benefit Plan to a beneficiary of a retired U.S. military member with a least 20 years or medical retirement.

There are 22 states which currently do not tax military retirement pay: Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Mississippi, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Utah, West Virginia and Wisconsin.

Another 13 states, including North Carolina, have some type of exemption or special tax provision for military pensions.

According to the fiscal note, benefits paid to retirees earning five years of creditable service in the military retirement system as of Aug. 12, 1989, and their survivor beneficiaries are already deductible and can’t be deducted twice.

The fiscal note also estimates the net impact on tax revenue for the state of $30.8 million for 2021-22. The tax impact is estimated to rise four to five million each year with an estimate reaching $50.2 million in 2025-26.

Members of the military do pay federal income tax on their retirement benefits. The rate in North Carolina is a flat 5.25% income tax rate unless there is an exemption. Under a N.C. Supreme Court decision, Bailey v. The State of North Carolina, certain retirement benefits for state and federal employees, including military, cannot be taxed if they had five or more years of creditable service as of Aug. 12, 1989.

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A.P. Dillon is a North State Journal reporter located near Raleigh, North Carolina. Find her on Twitter: @APDillon_