Because cold, long winters are a distinct possibility on the east coast, New Yorkers often dream of and migrate to warmer climates when they retire. Without a job to keep them where they are, some New Yorkers are enticed by warmer weather or small-town living, and move south to states such as North Carolina. However, retirees should consider tax laws before deciding where to move after retirement; the North Carolina pension tax is different than the way pensions are taxed in New York.
North Carolina Pension Exclusion
Although there are some states with no income tax, pensions are taxable to North Carolina residents, regardless of what state the resident earned the pension in. However, if a resident worked for a New York state agency, and thus earned a public pension, he can exclude the first $4,000 of pension funds for that year from his North Carolina taxes. Private pension holders, on the other hand, can deduct the first $2,000 of pension funds per year from their state taxes.
Paying Tax on Social Security
If the only pension a North Carolina resident receives is Social Security funds based on his New York employment, then those funds are not taxable in North Carolina. North Carolina does, however, allows residents to deduct federal taxes paid on their Social Security pensions from their North Carolina state taxes. But, all other New York state pensions are taxable except for amounts excluded by law.
IRAs and 401k Plans
Retirement plans, such as IRAs and 401k plans, are considered private pensions in North Carolina. Thus, if a New York transplant receives funds from his IRA or 401k, he may exclude up to $2,000 of those funds from his North Carolina state taxes. However, if the New York retiree has more than one such pension plan, he cannot deduct a separate $2,000 for each plan. He must pay taxes on all pension amounts except the first $2,000.
Other Pension Considerations
North Carolina treats out-of-state pensions the same way it does in-state pensions for tax purposes. As a result, New York workers must consider North Carolina taxes for retirees when deciding whether to move to North Carolina for their golden years. North Carolina's income taxes are generally lower than New York's for some higher-income taxpayers; however, North Carolina excludes less pension funds each year from state taxes than New York. It is important for you to weigh your options carefully so your retirement dollars will last well into your retirement years.