North Carolina continues to be a premier destination for relocation, driven by a booming economy, attractive tax policies, and a vibrant cultural landscape.
For those moving from high-tax states, the “Tar Heel State” offers a significantly lower cost of living and housing costs that remain below the national average, according to Jason Deshayes, a partner and wealth advisor at Cerity Partners.
In a recent interview, Deshayes discussed topics from the state’s new 3.99% flat tax to major Social Security perks and everything else retirees need to know about the cost of living in the Tar Heel State.
Below is a transcript of that interview, edited for clarity and brevity.
Retirees should learn about the state’s income, Social Security, property, and estate tax policies before moving to North Carolina.
North Carolina taxes and retirement income: What to know before you move
Robert Powell: Are you thinking about retiring or moving to North Carolina? Are you aware of how the state taxes wages, Social Security, or distributions from retirement accounts? To help us walk through those issues is Jason Deshayes, partner and wealth adviser at Serity Partners. Jason, welcome.
Jason Deshayes: Thank you. I appreciate being here.
North Carolina’s flat income tax
Powell: Let’s start with individual income taxes. How does North Carolina treat income?
Deshayes: North Carolina uses a flat income tax, similar to many other states. The rate has been reduced over the last several years. It was 5%, then 4.75%, and now it’s 3.99%. There’s ongoing discussion about accelerating those reductions as part of the state budget. Because the state continues to attract businesses and new residents, those benefits are being pushed out to the tax base. It’s straightforward. Whatever your North Carolina taxable income is, you multiply it by the flat rate. There’s no tiered structure.
Investment income treatment
Powell: That would include W-2 income. What about interest, dividends, and capital gains?
Deshayes: They’re all taxed the same way at the state level. There are no preferential rates like you see federally. If you own municipal bonds issued in North Carolina, the interest is exempt from both federal and state income tax. Interest from U.S. government obligations is exempt from state tax, though it is taxed federally.
Social Security and Medicare premiums
Powell: What about Social Security?
Deshayes: North Carolina does not tax Social Security. That’s a meaningful benefit for retirees. In addition, Medicare premiums can be added to federal itemized deductions, which are allowed for North Carolina purposes.
Powell: That includes Part B, Part D, and Medigap premiums?
Deshayes: Yes. Any supplemental policies that fall under medical expenses.
Property tax relief for seniors
Powell: Property taxes can be a concern for retirees. Are there relief programs people should know about?
Deshayes: Yes. These programs are generally aimed at lower-income seniors. There’s an elderly and disabled exclusion for households with income around $36,000 or less. It allows an exclusion of $25,000 or 50% of the assessed value, whichever is greater. There’s also a disabled veterans exclusion that reduces assessed value by about $45,000. Finally, there’s a circuit-breaker program for homeowners age 65 and older with income of $55,000 or less. These can meaningfully reduce property tax bills.
Taxation of retirement accounts and pensions
Powell: How are pensions and distributions from 401(k)s and IRAs taxed?
Deshayes: They’re taxed at the same flat rate as other income. However, North Carolina has what’s known as Bailey Act coverage. If you have a federal, state, or local pension and had five years of creditable service as of Aug. 12, 1989, that pension may be fully exempt from state income tax.
There’s planning involved here. If someone rolls that pension into another account, they could lose the exemption. It’s important to work with a financial planner to preserve that benefit.
Powell: What about military or railroad retirement pensions?
Deshayes: Those are also exempt from North Carolina state income tax.
Estate and sales taxes
Powell: How about estate, inheritance, or sales taxes?
Deshayes: North Carolina does not have a state estate tax, so retirees only need to worry about federal estate taxes. Sales tax is a combination of a flat state rate plus local add-ons, which vary by county. Non-prepared food and many medical supplies are exempt. The state generally does not tax services.
Why retirees choose North Carolina
Powell: For retirees comparing states like Florida, South Carolina, and North Carolina, what stands out?
Deshayes: North Carolina offers a mix of business growth and quality of life. You can live near the mountains or the coast, with strong job growth but without feeling like you’re in an oversized metro area. There’s a lot of green space, and many communities feel very livable.
Powell: Final question. Duke, UNC, or NC State?
Deshayes: We’re a Carolina blue household.
Powell: Then we’re aligned. Thanks for sharing your insights.