- As of 2026, 37 states do not tax military retirement pay at all — either because they have no state income tax or because they’ve enacted a full military retirement exemption.
- Only California and Washington D.C. fully tax military retirement income with no meaningful exemption.
- Recent additions include South Carolina (full exemption effective 2025) and New Hampshire (joined the no-income-tax states in 2025).
- Georgia expanded its exemption to $65,000 for retirees of any age beginning with the 2026 tax year — a major improvement from prior age-based limits.
- Vermont added a new full exemption for retirees with AGI of $125,000 or less, effective tax year 2025.
- A retiree with a typical $40,000–$60,000 annual pension could save $1,500–$3,500/year by retiring in a tax-exempt state vs. a fully taxable one.
Table of Contents
- How State Taxation of Military Retirement Works
- State-by-State Tax Status at a Glance (Chart)
- States With No Income Tax (9 States)
- States With Full Military Retirement Exemption (28 States)
- States With Partial Exemptions (13 States)
- States That Tax Military Retirement Pay (2)
- Recent Changes: What’s New in 2025–2026
- What the Exemption Is Worth: Dollar Impact
- Beyond Income Tax: Other Factors When Choosing a Retirement State
- Frequently Asked Questions
Where you retire after military service can have a significant impact on how far your pension stretches. State income tax treatment of military retirement pay varies dramatically — from states that take nothing, to states that offer generous exemptions, to a small handful that tax it like any other income. This guide covers the complete 2026 picture: every state’s current policy, the most important recent changes, and what the difference means in real dollars for your household budget.
Military retirement pay is always subject to federal income tax (unless you receive VA disability compensation in lieu of retirement pay). What varies is the state layer on top of that. This article focuses exclusively on state-level treatment. For a broader look at military retirement finances, see our Military Retirement Planning Guide and Military Pension Calculator.
USMilitary.org is an independent educational resource not affiliated with any government agency. State tax laws change. Always verify your state’s current rules with your state’s department of revenue or a qualified tax professional. For official guidance on DFAS withholding, contact the Defense Finance and Accounting Service (DFAS).
How State Taxation of Military Retirement Works
Military retirement pay — the monthly pension earned after 20 or more years of service — is treated as ordinary income for federal tax purposes. States handle it very differently. There are essentially four categories:
- No income tax states — these states don’t tax any income, so military retirement pay is automatically exempt.
- Full military exemption states — these states have income taxes but have passed specific legislation exempting military retirement pay entirely.
- Partial exemption states — these states offer exemptions up to a certain dollar amount, or based on age, years of service, or income level.
- Fully taxable states — military retirement pay is treated like any other pension income and taxed at the state’s standard rate.
VA disability compensation is always 100% tax-free at the federal and state level, regardless of where you live. This is distinct from military retirement pay — the two are different programs with different tax treatment. See our VA Disability Compensation Calculator for more on disability pay.
State-by-State Tax Status at a Glance
Military Retirement Pay: State Tax Treatment (2026)
Based on 2025 tax year rules effective for 2026 filing
No income tax (9)
Full exemption (28)
Partial exemption (13)
Fully taxable (2)
States With No Income Tax (9 States)
These nine states levy no personal income tax at all, making military retirement pay automatically exempt. They’re consistently popular retirement destinations for veterans for this reason, though other taxes — property, sales — vary considerably.
| State | Notes for Military Retirees |
|---|---|
| Alaska | No state income tax. Also has no statewide sales tax. High cost of living in most areas. |
| Florida | No state income tax. One of the largest concentrations of military retirees in the country. No estate or inheritance tax. |
| Nevada | No state income tax. Higher sales tax (6.85% base rate). No inheritance tax. |
| New Hampshire NEW 2025 | Eliminated its tax on interest and dividend income in 2025, becoming a true no-income-tax state. Military retirement pay was already not taxed; this change removed the last vestige of NH income taxation. |
| South Dakota | No state income tax. Low property taxes relative to national average. No inheritance tax. |
| Tennessee | No state income tax (eliminated its Hall Tax on investment income in 2021). No taxes on wages or retirement income. |
| Texas | No state income tax. High property taxes in many areas — factor this into total cost of living calculations. Large veteran population and strong VA/DoD presence. |
| Washington | No state income tax on wages or retirement income. Has a capital gains tax (7%) on certain investment gains over $250,000 — generally not a concern for pension-only retirees. |
| Wyoming | No state income tax. Low cost of living and low property taxes make it attractive for budget-conscious retirees. |
States With Full Military Retirement Exemption (28 States)
These states have income taxes but have passed specific legislation fully exempting military retirement pay. Some exemptions are unconditional; others have eligibility conditions worth noting.
| State | Exemption Details |
|---|---|
| Alabama | Fully exempt. One of the most veteran-friendly states in the South. |
| Arizona | Fully exempt for all military retirees regardless of age or income. Earlier partial exemption has been expanded to full status. |
| Arkansas | Fully exempt. |
| Connecticut | Fully exempt for qualifying nonresidents on active duty. Military retirement pay is not taxable for CT residents who meet specified conditions. |
| Hawaii | Fully exempt. Note that Hawaii has a high cost of living which may offset tax savings. |
| Illinois | Fully exempt. Illinois taxes most retirement income, but military pensions are specifically excluded by statute. |
| Indiana | Fully exempt. Indiana expanded its exemption to include Space Force retirees as well as retired U.S. Public Health Service (USPHS) and NOAA officers. |
| Iowa | Fully exempt. |
| Kansas | Fully exempt. |
| Louisiana | Fully exempt. |
| Maine | Fully exempt. Maine expanded its exemption to cover Space Force members and USPHS/NOAA Corps officers, effective 2026. |
| Massachusetts | Fully exempt. |
| Michigan | Fully exempt by statute for all military retirees. |
| Minnesota | Fully exempt. Minnesota’s exemption phased in over several years; it is now fully in effect. |
| Mississippi | Fully exempt. Mississippi does not tax any retirement income from qualified plans, and military pensions are included. |
| Missouri | Fully exempt. |
| Nebraska | Fully exempt. |
| New Jersey | Fully exempt. |
| New York | Fully exempt. New York taxes most income aggressively, but military retirement pay is carved out entirely. |
| North Carolina | Fully exempt under the “Bailey Exclusion” for retirees who had five or more years of creditable service as of August 12, 1989. Retirees who don’t meet the Bailey criteria may be subject to NC income tax on their pension — verify your eligibility. |
| North Dakota | Fully exempt. |
| Ohio | Fully exempt. |
| Pennsylvania | Fully exempt. Pennsylvania does not tax most retirement income, including military pensions. |
| South Carolina NEW 2025 | Fully exempt effective tax year 2025. Previously SC offered only a partial exemption. This is one of the most significant recent changes for military retirees — at a 6.5% state tax rate, a $50,000 pension saves approximately $3,250 annually. |
| Vermont NEW 2025 | Fully exempt for residents with AGI of $125,000 or less; partially exempt for AGI between $125,000 and $175,000. Act 71, signed in 2025, also created a new Vermont Veteran Tax Credit for eligible veterans. |
| West Virginia | Fully exempt. |
| Wisconsin | Fully exempt. |
| Oklahoma | Exempt up to 75% or $10,000, whichever is greater — effectively a full exemption for most military retirees with pensions under the typical range. |
States With Partial Exemptions (13 States)
These states recognize military retirement pay deserves favorable treatment but cap the exemption or apply age/income conditions. The rules can be complex — always verify with your state’s revenue department.
| State | Exemption Details |
|---|---|
| California | Up to $20,000 excluded for single/head-of-household filers with AGI under $125,000, or joint filers under $250,000. Military retirement pay is otherwise fully taxable — California remains the most prominent state that taxes military retirement income broadly. The Governor’s Budget has proposed expanding this exemption, but full exemption legislation has not passed as of 2026. |
| Colorado | Up to $24,000 of federally taxable retirement income (including military pay) exempt for retirees age 65+; up to $20,000 for ages 55–64; up to $15,000 for retirees under 55. |
| Delaware | Up to $12,500 of pension income exempt for taxpayers of any age (Delaware recently removed prior age requirements). Legislation to increase the exemption to $25,000 is under discussion. |
| Georgia NEW 2026 | Up to $65,000 exempt for retirees of any age, effective tax year 2026. This is a major expansion — previously, the $65,000 cap was only available to retirees 65 and older. Retirees under 62 were previously limited to $17,500. At Georgia’s flat 5.49% rate, this change is worth up to $3,575/year in additional savings for younger retirees. |
| Idaho | Fully exempt for disabled retirees and retirees age 62 and older. Younger non-disabled retirees are subject to Idaho income tax on their pension. |
| Kentucky | Pre-1998 retirees: fully exempt. Post-1997 retirees: up to $31,110 exempt. If you retired before 1998, your full pension is tax-free in Kentucky. |
| Maryland | First $12,500 exempt; increases to $20,000 at age 55. Not as generous as neighboring states like Pennsylvania (full exemption), which is worth noting if you’re comparing Mid-Atlantic retirement options. |
| Montana | Starting with tax year 2024, Montana residents who work in Montana may deduct up to 50% of military retirement or survivor pay for up to the first five years of eligibility. Retirees 65 and older also receive an additional $5,500 subtraction from federal taxable income. |
| New Mexico | Up to $30,000 exempt for tax years 2024–2026. All income is exempt for taxpayers who are 100 years or older. |
| Oregon | Military retirement pay for service before October 1, 1991, is exempt. Service after that date is taxable. If you had service that spans both periods, a portion may be exempt. |
| Utah | Offers a non-refundable tax credit equal to 4.5% (Utah’s flat income tax rate) of retired pay — effectively offsetting the Utah income tax on military retirement pay dollar-for-dollar. While technically taxable, the credit makes it functionally equivalent to an exemption for most retirees. |
| Virginia | $40,000 exemption for the 2025 tax year and beyond. Virginia has been gradually increasing this amount over recent years. At Virginia’s top income tax rate of 5.75%, a $40,000 exemption saves up to $2,300 annually. |
| Vermont | See “Full Exemption” above — Vermont now offers a full exemption for retirees with AGI of $125,000 or less, with a partial exemption (phasing out) between $125,000 and $175,000 AGI. |
States That Fully Tax Military Retirement Pay (2)
As of 2026, only two jurisdictions fully tax military retirement pay with no meaningful military-specific exemption:
- California — The only state that broadly taxes military retirement income. California offers a partial exclusion (up to $20,000) for eligible retirees under income thresholds, but for most veterans with a decent pension, a significant portion remains taxable. At California’s top marginal rates (up to 13.3%), this is by far the most expensive state for military retirees in terms of income tax.
- Washington, D.C. — The District of Columbia taxes military retirement pay as ordinary income, with no military-specific exemption. DC has a progressive income tax ranging from 4% to 10.75%.
Recent Changes: What’s New in 2025–2026
The trend over the past several years has strongly favored expanding military retirement tax exemptions. States are increasingly recognizing that attracting and retaining veteran residents — who tend to be working-age, skilled, and economically active — is good policy. Here are the most significant changes since 2022:
- South Carolina (2025) — Full exemption enacted. Previously SC had a partial exemption. The new full exemption means a retiree with a $50,000 pension saves approximately $3,250/year compared to before. This is one of the largest single-state changes in recent years.
- Vermont (2025) — New AGI-based full exemption. Vermont enacted Act 71 in 2025, creating a full exemption for military retirement pay for filers with AGI of $125,000 or less. A new Vermont Veteran Tax Credit was also established.
- Georgia (2026 tax year) — Age cap removed from $65,000 exemption. Georgia’s $65,000 exemption is now available to retirees of any age, not just those 65 and older. Younger retirees in their 40s and early 50s — common in military retirement — benefit most from this change.
- New Hampshire (2025) — Joined no-income-tax club. NH eliminated its Hall Tax on interest and dividends, completing its transition to a state with no income tax on any income.
- Indiana and Maine (2026) — Space Force/USPHS/NOAA expansion. Both states expanded their full exemptions to explicitly cover Space Force retirees and retired U.S. Public Health Service and NOAA officers.
- Delaware — Age requirement removed. Delaware eliminated the age requirement for its pension exclusion, allowing retirees of any age to exempt up to $12,500. Further increases are being discussed legislatively.
- Virginia — Exemption increased to $40,000. Virginia’s military retirement exemption reached $40,000 for the 2025 tax year, continuing its phased expansion.
What the Exemption Is Worth: Dollar Impact
The financial impact of state tax treatment depends on your pension amount and your state’s income tax rate. Here’s a practical illustration using a hypothetical retired E-8 or O-4 with a $48,000 annual military pension:
- In a no-income-tax state (Texas, Florida, etc.): $0 state tax on retirement pay. Full $48,000 retained.
- In a full-exemption state (Alabama, Illinois, Michigan, etc.): $0 state tax on retirement pay. Full $48,000 retained.
- In Virginia ($40,000 exemption, 5.75% rate): $8,000 taxable × 5.75% = $460/year in state tax.
- In California (partial exemption, 9.3% marginal rate): Approximately $26,000 taxable (after partial exclusion) × 9.3% = roughly $2,400+/year in state tax.
- In Washington D.C. (fully taxable, ~8% rate): Full $48,000 taxable at an estimated blended 8% = approximately $3,840/year in state tax.
Over a 20-year retirement, the difference between living in a fully tax-exempt state versus California or D.C. could exceed $75,000 in cumulative tax paid — real money that could fund home equity, travel, or your family’s financial security. The choice of retirement state matters.
TRENDING: See Today’s VA Loan Rates
For a complete view of how your pension amount is calculated in the first place, use our Military Pension Calculator. If you’re weighing the Blended Retirement System against the legacy High-36 system, our Military Retirement Planning Guide covers that decision in depth. And if you’re thinking about using a VA loan to buy a home in your retirement state, our VA Loan guide explains how your pension income can support a mortgage application.
Beyond Income Tax: Other Factors When Choosing a Retirement State
Income tax on your pension is one piece of the financial picture, but not the only one. When evaluating retirement states, military retirees should also weigh:
- Property taxes. Texas has no income tax but high property taxes in many cities. Wyoming and Alabama offer lower property taxes. Some states offer property tax exemptions specifically for disabled veterans — see our Veteran Benefits by State guides for specifics.
- Sales tax. States like Oregon and Montana have no sales tax, which can add meaningful savings for retirees on fixed incomes. Tennessee has no income tax but a combined sales tax rate often exceeding 9%.
- VA healthcare access. Proximity to VA medical centers, military commissaries, and base exchanges (BX/PX) is a practical quality-of-life factor. States with large veteran populations — Texas, Florida, Virginia, North Carolina — tend to have stronger VA infrastructure.
- Cost of living. A state with no income tax but high housing, utility, and healthcare costs may not be a net win compared to a partial-exemption state with lower overall living expenses.
- Second income and post-military career. If you plan to work after retiring from the military, your state’s treatment of earned income matters alongside your pension. States with flat, low income taxes may be more favorable for retirees who also earn civilian wages.
- Survivor Benefit Plan (SBP). If you participate in the Survivor Benefit Plan, consider how your state treats SBP payments for your surviving spouse. Most states that exempt military retirement pay also exempt SBP annuity payments, but this isn’t universal — verify for your specific state.
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Frequently Asked Questions
As of 2026, 37 states do not tax military retirement pay at all — 9 states with no income tax, plus 28 states with full military retirement exemptions. Additionally, around 13 states offer partial exemptions. Only California and Washington D.C. fully tax military retirement income with no meaningful military-specific exclusion.
Yes. Military retirement pay is subject to federal income tax at your applicable rate, the same as other ordinary income. VA disability compensation is always federally tax-free, but that is a separate program from military retirement pay. You can request federal income tax withholding from your retirement pay through DFAS using IRS Form W-4P.
The nine no-income-tax states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) and the states with unconditional full exemptions (Alabama, Illinois, Michigan, Mississippi, etc.) offer the maximum tax benefit. Florida, Texas, and South Carolina are frequently cited as top overall picks because they combine no income tax or full pension exemption with strong veteran infrastructure, reasonable cost of living in many areas, and large military communities. The “best” state ultimately depends on your full financial picture, including property taxes, cost of living, and whether you’ll work in retirement.
In most states that exempt military retirement pay, Survivor Benefit Plan payments to surviving spouses receive the same favorable treatment. However, this isn’t guaranteed — some states have specific rules. Always verify your state’s SBP treatment with your state’s department of revenue or a tax professional.
Generally, the state where you are a legal resident at the time you receive the income is the state that can tax it. Under the Servicemembers Civil Relief Act (SCRA), active-duty members maintain their legal state of residence. Once you retire and establish a new legal residence, that state’s rules apply going forward. Most states allow you to claim exemption simply by filing as a resident and claiming the applicable pension deduction on your state return.
This article is provided by USMilitary.org, an independent educational resource not affiliated with any government agency. State tax laws change frequently — verify current rules with your state’s department of revenue or a qualified tax professional before making financial decisions.
