Updated October 5, 2026. Quick answer: Yes. North Carolina taxes annuity income that is in federal adjusted gross income at a flat rate: “In 2025 4.25% After 2025 3.99%”. There is no general annuity exclusion; the Bailey deduction covers government retirees, and the instructions say it does not apply to “local government §457 plans or to §403(b) annuity plans”.
State retirement-income forms, line by line: North Carolina Schedule S.
How North Carolina treats annuity income
| Item | What the documents say |
|---|---|
| Treatment | Taxed at a flat rate; no general annuity exclusion |
| 2025 rate | 4.25% |
| 2026 rate | 3.99% |
| Deductions | Bailey deduction for vested state, local and federal government retirees; a separate deduction for uniformed-services retirement pay |
| Statute | G.S. 105-153.7 (rate); G.S. 105-153.5 deducts “amounts received from retirement annuities or pensions paid under the provisions” of certain federal systems |
A $24,000 example
A stream of $24,000 in annuity payments adds $24,000 x 4.25% = $1,020 of North Carolina tax for 2025, and $24,000 x 3.99% = $957.60 for 2026, when all of it is in federal adjusted gross income.
What changes in 2026
The statute sets the rate at 3.99% for tax years after 2025, down from 4.25% in 2025.
Federal rules
The state’s treatment sits on top of the federal one. The IRS explains the federal side in Topic no. 410, Pensions and Annuities and Publication 575, Pension and Annuity Income.
Related: whether North Carolina taxes pensions, how North Carolina taxes retirement income, annuity income tax by state, how a surrendered annuity is taxed, and pension and annuity decisions.
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Answer againSources
- 2025 D-401 Individual Income Tax Instructions (North Carolina Department of Revenue): https://www.ncdor.gov/2025-d-401-individual-income-tax-instructions/open
- G.S. 105-153.7 Individual income tax imposed (North Carolina General Assembly): https://www.ncleg.gov/EnactedLegislation/Statutes/HTML/BySection/Chapter_105/GS_105-153.7.html
- G.S. 105-153.5 Modifications to adjusted gross income (North Carolina General Assembly): https://www.ncleg.gov/EnactedLegislation/Statutes/HTML/BySection/Chapter_105/GS_105-153.5.html
Sources: the primary documents linked above, read on October 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer, the plan administrator or the agency itself is the right place to confirm anything consequential.