Wife is retired teacher in North Carolina vested and state does not require taxes on her retirement income. Turbo tax treats this income as taxable. How do I enter it to

As long as she had 5 years of service credited before 12 Aug of 1989...then she would qualify for the "Bailey Settlement" .

The procedure is the same in TurboTax every year, so (perhaps) print this out for next year and file it.

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Go back and edit the 1099-R form in the Federal section.

 After you enter your 1099-R form, and "Continue" thru the pages that follow it...until you find the selections for:

1) "Bailey settlement...."....................<<<<you are selecting this one
2) "Faulkenbury settlement...."
3) "Railroad Ret-SS.........."
4) "None of the above"

You need to select the "Bailey Settlement..."

Your NC Distribution amount is the same a box 2a of the 1099-R form (or the calculated federally-taxable amount for box 2a, if 2a is empty)....... that $$ will be removed in the NC section depending on what selection you made above.

(Picture Below)

.....Far fewer retired folks have any Pension exemption $$.  BUT...IF you were into your NC-State or Federal/Military pension system, 5 years as of 12 Aug 1989, you can choose the "Bailey Settlement..." and all of that particular 1099-R will be exempted from NC taxation...otherwise you will likely choose "None of the above"

So that 5-years employment by the Feds, or NC-State Gov't-related plan, by 12 Aug 1989 is critical....if you weren't employed by the feds that early...then your federal annuity is not exempt from NC taxation