Is North Carolina Tax-Friendly for Retirees? In this video, Jason Deshayes joins Bob Powell to discuss his article about the advantages of moving to North Carolina. Watch this video to answer the question: Is North Carolina Tax-Friendly for Retirees?

Article: By Jason Deshayes

Is North Carolina a Smart Retirement State in 2026? What Retirees Should Know About Taxes and Costs:

Lower living costs, a shrinking income tax rate and no tax on Social Security have made North Carolina increasingly attractive to retirees. Here’s how the state’s tax rules and benefits stack up as 2026 approaches.

North Carolina has become an increasingly attractive place for people to relocate, driven by a booming economy, attractive tax policy and a vibrant physical and cultural landscape. The cost of living in North Carolina is lower than the national average, with housing costs also significantly lower.

State taxes

Taxpayers in North Carolina are subject to a flat income tax rate, which has been reduced over the years. Beginning in 2024, the individual income tax rate is a flat 4.5%, down from 4.75% in 2023. In 2025, the rate will decrease to 4.25%, and in 2026 and beyond, it will fall to 3.99%. Due to budget surpluses, there are trigger points that could result in further reductions to the individual income tax rate.

Interest, dividends and capital gains are also taxed at the prevailing flat tax rate. However, municipal bond interest on North Carolina bonds is not taxable in North Carolina. U.S. government interest, such as Treasury bond interest, is also not taxed in the state.

Social Security and Medicare

Social Security income is not taxed in North Carolina, representing a major benefit for retirees. Medicare premiums are an important consideration in retirees’ tax planning. If you itemize deductions, these premiums may be tax-deductible if your medical expenses exceed 7.5% of your adjusted gross income.

Property tax

Real estate in North Carolina is subject to property taxes that are assessed and collected locally by individual counties. As a result, rates can vary widely depending on the county in which a home is located. Property taxes are generally due near the end of the calendar year. There are property tax exemptions available for lower-income individuals who are at least 65 years old or who are totally and permanently disabled.

There are three separate property tax relief programs available, although only one program may be used at a time. These include an elderly or disabled exclusion, a disabled veteran exclusion and a circuit breaker tax deferment program. Homeowners must determine which program provides the greatest benefit before applying.

The elderly or disabled exclusion applies to residents who are 65 or older or permanently disabled and who have a combined income, including a spouse, of $36,700 or less for the 2024 tax year. This program provides an exclusion of $25,000 or 50% of the assessed value of the residence, whichever is greater.

The disabled veteran exclusion provides an exclusion of the first $45,000 of the appraised value of a qualifying residence. There is no age or income limit for this exclusion.

The circuit breaker exclusion offers property tax relief for individuals who are 65 or older or permanently disabled and who have a combined income of less than $55,050. The program limits property taxes to a percentage of the owner’s income. For owners with income not exceeding $36,700, property taxes are limited to 4% of income for the 2024 tax year. For those with income between $36,700 and $55,050, taxes are limited to 5% of income.

Pensions and retirement distributions

Most pensions are subject to North Carolina’s flat income tax. However, certain federal, state or local government pensions may be exempt under the Bailey Act if the individual had five or more years of creditable service as of Aug. 12, 1989. It is important to be cautious when rolling assets out of Bailey-qualified retirement plans, as doing so may result in the loss of this state tax benefit.

Generally, distributions from other retirement plans, such as 401(k) plans, are subject to North Carolina’s flat income tax. Railroad and military retirement benefits are not subject to state income tax.

Estate and inheritance tax

North Carolina repealed its state estate tax in 2013, so residents are no longer subject to a state estate tax. Federal estate tax rules still apply. The state also does not levy an inheritance tax.

Sales tax

North Carolina imposes a flat 4.75% state sales tax, with local governments adding their own local sales taxes. Depending on the municipality, the total sales tax rate can be as high as 7.5%. Some items are exempt from sales tax, including nonprepared food items and certain medical supplies.

If you are considering relocating to North Carolina, it may be wise to consult a financial professional, such as a CPA/PFS or CFP®, to walk through the decision. While North Carolina’s income tax system is relatively straightforward, the change can be meaningful depending on where you are moving from. For example, individuals relocating from Texas, which has no state income tax but higher property taxes, may be unaccustomed to filing a state tax return or paying state income taxes at all, but pleasantly surprised by North Carolina’s lower property taxes.

While the tax tail should not wag the dog, it is important to approach a relocation decision with your eyes wide open. You can find a licensed professional here: https://www.aicpa-cima.com/directories

About the author

Jason Deshayes is a partner and wealth advisor at Cerity Partners, based in Raleigh, North Carolina, where he provides integrated tax, financial planning and wealth management advice. He holds the CERTIFIED FINANCIAL PLANNER® designation, is a Certified Public Accountant with the Personal Financial Specialist credential, and is a Certified Kingdom Advisor. His practice focuses on helping high-net-worth individuals and families navigate complex financial decisions and align their resources with long-term goals.