The Bailey Settlement — Everything Untaxed, If You Were Five Years In by August 1989
North Carolina's existing military retirement deduction is capped. The Bailey settlement is not: it EXCLUDES QUALIFYING RETIREMENT BENEFITS IN FULL from North Carolina income tax for anyone with FIVE OR MORE YEARS OF CREDITABLE SERVICE AS OF 12 AUGUST 1989. It came out of litigation, not a benefits programme, which is why it is filed under a court decision rather than under veterans benefits and why so few people find it. It also reaches BENEFICIARIES, and 401(k) and 457 plans qualify where contributions began before that date.
Verified August 27, 2026
What this benefit is
North Carolina's existing military retirement deduction is capped. The Bailey settlement is not: it EXCLUDES QUALIFYING RETIREMENT BENEFITS IN FULL from North Carolina income tax for anyone with FIVE OR MORE YEARS OF CREDITABLE SERVICE AS OF 12 AUGUST 1989. It came out of litigation, not a benefits programme, which is why it is filed under a court decision rather than under veterans benefits and why so few people find it. It also reaches BENEFICIARIES, and 401(k) and 457 plans qualify where contributions began before that date.
What it's worth: Qualifying retirement benefits excluded from North Carolina income tax in full
- FULL EXCLUSION — not a capped deduction. North Carolina's separate §105-153.5 military retirement deduction is capped; Bailey is not.
- Requires FIVE OR MORE YEARS OF CREDITABLE SERVICE AS OF 12 AUGUST 1989.
- It also covers FEDERAL, NORTH CAROLINA STATE AND LOCAL GOVERNMENT retirees, not only military.
- BENEFICIARIES of a qualifying retiree are covered.
- 401(k) and 457 plans qualify where CONTRIBUTIONS BEGAN BEFORE that date.
- Claimed as a deduction on FORM D-400 SCHEDULE S with Form 1099-R or W-2 attached.
- It arises from litigation — the Bailey decision — which is why it is not filed under veterans benefits anywhere.
Who is entitled to it
- You are in one of the groups this reaches.
- You had five years of creditable service by 12 August 1989.
- You are a North Carolina taxpayer.
- North Carolina income tax.
Not sure whether that describes you?
Answer a few questions about this benefit specifically — we only ask what this one actually depends on, and we stop as soon as we know.
How to claim it
Deadline: With the annual D-400- 1Work out where you stood on 12 AUGUST 1989. Five years of creditable service by that date is the whole test.
- 2Claim it on Form D-400 Schedule S, attaching the 1099-R or W-2.
- 3If Bailey applies to you, use it INSTEAD of the capped military retirement deduction — Bailey is uncapped.
- 4Beneficiaries of a qualifying retiree should claim in their own right.
- 5If you have a 401(k) or 457 with contributions starting before that date, ask whether it qualifies too.
- 6If you have been paying tax on this for years, ask the Department of Revenue about amending within the statutory period.
- Form
- Form D-400 Schedule S
- File with
- North Carolina Department of Revenue
- Annual
- Claimed once a year.
Sources
- authority · published policyNCDOR — Bailey decision concerning federal, state and local retirement benefits
- operating · published policyNC Department of Military and Veterans Affairs
This finder provides an informational match, not a government eligibility determination. The responsible agency decides your application.