You’ve served your country for 20 years or more, and now you are thinking about the next chapter. That military pension you earned is a cornerstone of your financial security. One thing you might not have spent a lot of time thinking about is how where you live can dramatically change how much of that pension you actually get to keep. State governments have their own rules, and understanding the military retirement state income tax is a huge piece of your retirement puzzle.
This decision will impact your budget for years to come, affecting your quality of life after a long career. Figuring out the rules for military retirement state income tax is a vital first step in your transition. Your choice of a new home state will determine how much of your hard-earned retired pay ends up as taxable income.
Table of Contents:
- Why State Taxes Matter for Your Military Pension
- States with No Income Tax at All
- States That Fully Exempt Military Retirement Pay
- A Closer Look at Military Retirement State Income Tax Exemptions
- Other Financial Factors to Consider
- What About VA Disability and Survivor Benefits?
- Conclusion
Why State Taxes Matter for Your Military Pension
You have paid federal taxes for your entire career as a service member. State taxes are another layer on top of that, which you must now consider for your retirement benefits. Every state with an income tax has its own set of rules and rates for military income.
A few percentage points here or there really add up over time. Think about it over 20 or 30 years of retirement. A state that taxes your military retired pay could take thousands of dollars out of your pocket, impacting your military retirement benefit.
It is important to know that states treat different types of income differently. Just because a state has an income tax does not automatically mean your military retirement pay is on the chopping block. Many states have created special rules for honorably discharged veterans from the Air Force, Coast Guard, and other branches.
States with No Income Tax at All
Let’s start with the simplest option for your retirement benefit. Some states make the tax question incredibly easy because they do not have a personal income tax at all. If you establish your primary residence in one of these states, your military pension is safe from state taxes.
These states are:
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
New Hampshire and Tennessee are also often on this list. They do not tax wages or retirement income, including your military retirement income. But they do tax interest and dividend income, which is something to keep in mind for your investments and overall gross income.
The lack of an income tax can be a huge advantage for a retired military professional. However, you need to look at the whole picture. States have to get money from somewhere to pay for infrastructure, so they may have higher property taxes, sales taxes, or even a business tax if you plan to start a second career.
States That Fully Exempt Military Retirement Pay
Many other states have recognized the value that military retirees bring to their communities. To attract you, they have passed laws that make your military retirement pay completely exempt from state income tax. This means that while they might tax other types of income, your hard-earned pension is off-limits.
This list is quite long and continues to grow as more states compete for retired military families. These states give you a massive financial advantage. It is like getting the best of both worlds: public services funded by an income tax that you do not have to pay on your retirement benefits.
Here’s a table of states that, despite having an income tax, will not tax your military retirement pay. This complete income exclusion is a significant veteran benefit. It applies to all military retired pay, no matter your age or income level.
| Alabama | Arizona | Arkansas |
| Connecticut | Hawaii | Illinois |
| Indiana | Iowa | Kansas |
| Louisiana | Maine | Massachusetts |
| Michigan | Minnesota | Mississippi |
| Missouri | Nebraska | New Jersey |
| New York | North Carolina | North Dakota |
| Ohio | Oklahoma | Pennsylvania |
| Rhode Island | South Carolina | Utah |
| West Virginia | Wisconsin |
Living in one of these states can save you a lot of money. The state of South Carolina, for instance, passed a full exemption that went into effect for the 2022 tax year. This policy reflects an appreciation for your service and encourages a continued military life within the state’s communities.
States like Illinois, Indiana, Iowa, Kansas, and Louisiana all provide this full exemption, making them attractive options. The same goes for Arkansas, Connecticut, and Hawaii. This widespread support for a full income exclusion for military retired pay shows a national trend of valuing veteran contributions.
A Closer Look at Military Retirement State Income Tax Exemptions
Some states do not offer a full exemption. Instead, they give partial tax breaks or have special conditions. This is where you have to pay close attention to the details, as the rules can be based on your age, your income, or just a set dollar amount.
States with Age or Income Rules
In some places, how much of your pension is taxed depends on how old you are or your total income. These rules are different from one state to the next. They often interact with other retirement income sources, like Social Security benefits.
For example, in Colorado, your exemption amount changes as you get older. Retirees under 55 get one exemption level. But those 65 and over get to exclude a larger amount of their retirement income from their state tax return.
Delaware also has an age-based system. If you are under 60, you can exclude a certain amount of your military pension, but this increases for those over 60. Other states like Idaho have similar rules, where benefits kick in for retirees over a certain age, sometimes combining military retirement with Social Security for exemption calculations.
Georgia offers a very generous exemption that also depends on your age. The older you are, the more of your retirement income you can protect from state taxes. Maryland also increases its tax exemption for military retirement once you turn 55, offering a significant break for older retirees.
States with Partial Dollar Exemptions
Another group of states gives you a break, but it is capped at a certain dollar amount. It is not a full exemption, but it is certainly better than nothing. This can still lead to big savings each year on your tax military retirement pay.
Kentucky, for instance, allows a large portion of retirement income to be excluded. The exact amount can change, so it is good to check with the Kentucky Department of Revenue. New Mexico also lets retirees exclude a substantial amount of military retirement pay from their taxable income.
Virginia has been making big changes recently. The state is increasing its exemption for military retirees every year. This phased approach shows a positive trend for military families in the state, even if it is not a full exemption yet.
Montana has a more specific rule that can be beneficial for those who continue to work. Residents there may be able to deduct half of their military retirement for up to five years. Rules like this show how important it is to read the fine print for your specific tax year.
How to Claim Your Exemption
Claiming these valuable tax military benefits requires you to take action when you file your state tax return. The process varies by state, but you will generally find a specific section on the state income tax form to report your military retirement income and claim the exclusion. It will not be automatic; you have to report it correctly.
Look for a line item or a specific schedule related to retirement income or pensions. Often, there will be a checkbox label or a line with a description like “Military Retirement Exclusion.” You might need to fill out a separate worksheet to calculate the amount of your military pay you can legally exclude.
Using tax preparation software or a mobile app can simplify this process, as they are usually updated with the latest state tax laws. When using such a program, be sure to find the correct entry field, which may have a simple label label like “military pension.” Failing to correctly identify this income could result in you overpaying your taxes, so double-check your work.
Other Financial Factors to Consider
You have seen that state income tax is a huge factor. But it is not the only one. Choosing where to retire is a complex decision with many financial and lifestyle variables.
Do not Forget Property Taxes
This is the big one that many people forget. You might move to a state with no income tax only to find your property tax bill is enormous. Texas and Florida, for example, have some of the higher property tax rates in the nation, which can offset your income tax savings.
However, many states also offer property tax exemptions for veterans. These are often tied to your disability rating from the VA, or sometimes for any honorably discharged veteran. A 100% disabled veteran might pay no property taxes at all on their primary residence in some states, a benefit that can be worth thousands annually.
Sales Tax and Overall Cost of Living
How much you pay every time you go to the store also matters. State and local sales taxes can take a bite out of your budget. A state like Oregon has no sales tax, which is a nice perk, even though it has a partial income tax on some retirement income.
Beyond taxes, you need to think about the general cost of living. How much do homes cost? What about groceries, gas, and utilities? A low-tax state might not be a bargain if everything else is too expensive for your retired pay to cover comfortably.
Access to Military and VA Facilities
Finally, think about your lifestyle and healthcare needs. Living near a military base can give you access to the commissary, exchange, and MWR facilities. This can lead to significant savings and a strong sense of community for any National Guard or active duty member, as well as retirees.
Being close to a VA medical center or clinic is a top priority for many veterans. The quality and accessibility of VA healthcare can vary greatly by region. These factors might be more important to you than any tax credit or exemption.
What About VA Disability and Survivor Benefits?
It is good to be clear on a couple of related points. First, VA disability compensation is not the same as military retirement pay. According to the Internal Revenue Service (IRS), your VA disability benefits are not taxable at the federal or state level, regardless of where you live.
The Survivor Benefit Plan (SBP), is different. This is the annuity paid to a surviving spouse as part of the overall benefit plan. Survivor benefit plan payments are generally treated the same as military retirement pay by the states.
So, if a state taxes military retirement, it will also tax SBP benefits received by surviving spouses. If it exempts retired pay, it will also exempt the survivor benefit. This is a critical piece of information for spouses planning their financial future, as these plan payments can be a primary source of income.
Conclusion
Choosing your retirement home is one of the most important decisions you will make after hanging up the uniform. Your choice has a direct impact on your financial health for decades to come. Doing your research on military retirement state income tax now can prevent you from making a costly mistake with your retirement funds.
Look at each state’s complete tax situation, from income and property taxes to sales tax. Consider what is important to you and your family in terms of lifestyle and access to healthcare. By putting all these pieces together, you can find the perfect place to enjoy the military retirement benefit you rightfully earned.
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