Maybe you’re on the verge of retirement from the military. Perhaps you’ve already retired and are looking to understand your financial situation a little better. Regardless, you’re wondering: is military retirement pay tax exempt?
That’s a complex question with a complex answer. As such, we’re going to answer it in detail below, helping you understand just what your tax obligations will be over the coming years.
Ready? Let’s get into it!
Is Military Retirement Pay Exempt on a Federal Level?
Simply put, military retirement pay is not exempt on a federal level. You must still pay federal taxes on whatever you receive from military retirement.
It’s important to note, however, that military retirement is not taxed as wages. It’s taxed as a pension. As such, when filing your taxes, you’ll need to declare your retirement pay as a pension.
This won’t affect the amount of tax you have to pay, however. Whatever amount of money you receive from your retirement will just be added to your adjusted gross income. As such, the tax percentage won’t change.
In summation, military retirement is not exempt from federal tax. It’s subject to the standard tax rate of all other income.
Is Military Retirement Pay Exempt on a State Level?: States That Don’t Tax Military Retirement Pay
So far, the answer to this question has been straightforward. Now, it’s about to get a little more complex. Is military retirement pay exempt on a state level?
The answer: it depends on the state. Some states exempt military retirement and some don’t. Below, we’re going to discuss states that do exempt military retirement pay from taxes.
In the state of Alabama, military retirement pay is exempt from state, county, and municipal taxes. Therefore, if you live in the state and receive military retirement, you’ll only have to pay federal taxes on it.
Arkansas doesn’t tax military retirement pay on a state level. However, some counties and municipalities in the state might still tax it. Be sure to contact your municipality for further information.
In Connecticut, military retirement pay is fully exempt from state taxes. Like in Arkansas, however, some counties and municipalities might tax such income. Therefore, it’s important to call and ask before filing local taxes of any kind.
In Hawaii, military retirement pay is completely exempt from state taxes. This makes the island a popular destination for veterans. In fact, 9.5% of the state’s population is comprised of current and former military personnel.
Illinois does not tax military retirement pay in any way, shape, or form. Military retirement pay is completely tax-exempt in the Land of Lincoln.
As of 2022, Indiana does not tax military retirement income. Veterans will pay no state tax on their military retirement income in the Hoosier State.
Iowa is just like Illinois on this matter. The state does not tax military retirement pay in any manner.
Like Illinois, Indiana, and Iowa, Kansas does not levy a state tax on military retirement pay. Veterans living in Kansas must only pay federal taxes on their retirement income.
Louisiana follows the trend. In other words, they completely exempt military retirement pay from state taxes.
Maine completely exempts military retirement pay from state taxes. The state also offers veterans breaks on property taxes.
The Bay State doesn’t tax military retirement pay either. It’s completely tax-exempt in the state of Massachusetts.
Michigan also exempts military retirement pay from state taxes. Veterans in the Mitten State only have to pay federal taxes on their retirement pay.
Minnesota does not put a state tax on military retirement pay. Note, though, that in order for this income to be eligible, it must be included in the individual’s federal adjusted gross income.
In Mississippi, military retirement pay is entirely exempt from state taxes. Some military veterans (those who had a military-related injury and those who were honorably discharged) also get property tax breaks.
In Missouri, military retirement pay is completely exempt from state income taxes. It can also be deducted from your Missouri tax-adjusted gross income.
Starting in the 2022 tax year, Nebraska is excluding all military retirement pay from state taxes. Veterans will no longer have to pay taxes on their military retirement.
New Jersey exempts military retirement pay from state taxes. Veterans will pay no taxes on their retirement pay from the military.
Military retirement pay in New York is exempt from state taxes as well as New York City taxes. Note, though, that some municipalities in the state might still tax military retirement pay.
There is no state income tax levied against military retirement pay in North Dakota. Veterans in the state will not pay taxes on their military retirement pay.
The state of Ohio fully exempts military retirement pay from state taxes. Veterans in the Buckeye state owe no money to the state on behalf of the military retirement income they receive.
Oklahoma veterans no longer have to pay state taxes on their military retirement pay. This is new to the 2022 tax year.
Pennsylvania follows the trend. There are no state taxes paid on military retirement pay in the state.
South Carolina completely exempts military retirement pay from state taxes. Veterans in the state don’t need to pay taxes on their military retirement.
The state of West Virginia does not put an income tax on military retirement pay. Veterans will go state income tax-free in the state.
Wisconsin does not levy a state income tax against military retirement pay. Veterans will pay no state income tax on their military retirement pay in the state.
States Without Any State Income Tax
Some states don’t have a state income tax at all. These include Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington, and Wyoming. They have no state tax, and therefore don’t tax military retirement income.
States That Partially Tax Military Retirement Pay
We’ve just discussed the states that don’t tax military retirement pay at all. Now, let’s get into the states that partially tax military retirement pay. They include the following:
Arizona only requires partial tax payments on military retirement pay. Up until 2021, they provided exemptions on up to $2,500 of such pay. These days, they provide exemptions on up to $3,500 of military retirement pay.
In other words, $3,500 of your military retirement pay won’t be taxed by the state of Arizona.
In the state of Colorado, veterans under the age of 55 get to subtract a maximum of $15,000 a year from their state military retirement pay. Veterans between the ages of 55 and 65 get to subtract $20,000. Veterans 65 and over get to subtract $24,0000 from their retirement pay.
Delaware provides a $12,5000 exemption on military retirement pay. Veterans in the state will also receive a $12,500 max exemption on additional pension payments.
Georgia provides up to a $17,500 exemption on all retirement pay belonging to military veterans. It doesn’t matter whether this pay comes from the military or from another source. If a veteran meets the $17,500 threshold on military retirement pay alone, they can subtract up to an additional $17,500 of alternative retirement pay.
Idaho does not exempt military retirement pay from state taxes. However, it does allow veterans over 65 to exclude around $37,000 a year from qualified pensions and retirement plans.
Kentucky allows veterans to exclude up to $31,110 from their state taxes on government, private, and military retirement funds. This is true regardless of the veteran’s age.
Maryland puts state taxes on all military retirement income. That said, veterans over the age of 55 can deduct up to $15,000 of their military retirement income from their state taxes.
Montana offers a modest tax exemption for all pensions. It was $4,640 in 2022. That said, you have to make under $41,000 a year in order to claim it.
New Mexico typically taxes military retirement income fully. That said, from 2022 to 2026, they’re exempting certain amounts of it. In 2022, it’s exempted up to $10,000, followed by $20,000, $30,000, $30,000, and $30,000 in the following years.
In most cases, North Carolina doesn’t exempt military retirement pay from state taxes. The only exception to this is when the veteran in question served 20 years or more or was medically retired. In said cases, 100% of their military retirement pay is exempt.
In the state of Oregon, military retirement pay is only exempt from state taxes if it was earned before the date of October 1, 1991. Note, though, that those over the age of 62 do get a small deduction from pension income.
2022 is the last year that Rhode Island will tax any military retirement pay. That said, veterans of retirement age get up to a $15,000 deduction from this pay. From 2023 on, Rhode Island will no longer tax military retirement pay at all.
Starting in 2022, veterans in Virginia over the age of 55 can deduct up to $10,000 worth of military retirement pay. This is followed by deductions of $20,000 in 2023, $30,000 in 2024, and $40,000 from there on out.
States That Tax Military Retirement Pay Fully
There are only 4 states that fully tax military retirement pay without any breaks. These states include California, Vermont, and Utah. So, if you’re looking to move simply to avoid military retirement tax, you should avoid these states entirely.
Should You Move to Avoid Military Retirement Taxes?
Now, you might be wondering: should you move to avoid military retirement taxes? Is it a wise decision to do so? The answer: maybe.
Of course, this comes down to a number of factors. So, to help you make a decision, we’re going to discuss those factors in detail below.
How Dire Is Your Financial Situation?
First and foremost, you need to ask yourself how dire your financial situation is. Will this potential increase in after-tax income help you to lead a better life? Or, is it just the difference between a few meals out throughout the year?
Moving across the country to save a few hundred or a few thousand dollars a year is a bold choice. That’s not to say that you shouldn’t do it. However, you had better make sure it’s actually worth it to you.
What Will You Be Leaving Behind?
One of the hardest parts of moving is, of course, saying goodbye to the people and things that you leave behind. Will you be moving away from your parents or grown children? Will you be departing from the only community you’ve ever known?
A new locale may seem like the answer to all of your problems, especially if it’s saving you a decent chunk of money every year. However, there are consequences to moving away, and they might end up outweighing the money that you saved.
Will You Really Be Saving as Much as You Think You Are?
Some states exempt military retirement pay from state taxes. However, this doesn’t mean that they don’t make up for it in other ways. In other words, just because you’re saving on military retirement taxes doesn’t mean that you’re saving overall.
Your property taxes could end up being higher. Your state income taxes could end up being higher. You might even end up paying a higher sales tax.
As such, you shouldn’t move based solely on whether or not your military retirement pay is being taxed. You need to take the whole financial situation into account and then act accordingly.
To do this, you’re strongly advised to speak with a financial advisor. They’ll ensure that you dot all of your i’s and cross all of your t’s, and make sure that you’re making the right decision on a financial level.
Will You Enjoy the Lifestyle in Your New State?
Every state has its own culture. And even then, every municipality within every state has its own culture. As such, it’s hard to tell what exactly you’re moving to.
Everything looks like gold from hundreds of miles away. It’s not until you encounter it head-on that you actually get to see the imperfections present. These imperfections, if numerous enough, could make or break your decision.
This is why, if you’re thinking about moving to a different state, you need to do some heavy recon to ensure that you’ll enjoy the lifestyle there. You might like the idea of living on the Kansas plains, for instance, but the reality could end up being more than you bargained for.
Looking to Learn More About Military Pay?
Now that you have an in-depth answer to the question of “is military retirement pay tax exempt?”, you might be searching for other such info. If so, you’re in the right place. USMilitary.org has you covered.
We cover all sorts of military-related topics, from military income to military careers to military benefits and more. Check out some of our other retirement-related articles now!