There are 26 U.S. states that don't tax military retirement pay.
If you're a military member eligible for retirement, there are many benefits that may be available to you once you've completed your final out-processing appointments, begin your terminal leave, and start transitioning to life as a retired civilian.
Most often, people think about military retirement pay, which can include:
- Combat-related special compensation payments
- Concurrent retirement and disability pay
- Regular and reserve retirement payments
- Survivor benefit plan payments
- Temporary and permanent disability retirement payments
Once you start receiving your military retirement pay, it may or may not be taxed depending on where you live, since taxing military retirement pay is determined by each state. Here is a list of states that don't tax military retirement pay, states that do, and states that have other special tax provisions for military retirement pay.
What is military retirement pay?
If you've served on active duty in the U.S. Army, Navy, Air Force, Marine Corps, or Coast Guard for 20 years or longer, or have retired earlier for medical reasons, you may qualify for U.S. Military retirement pay.
Depending on when you joined the military, you can enroll in one of two main retirement systems:
The Legacy High-3 (High 36) System
Find the average of your highest 36 months of basic pay. Then, multiply that number times the years you served times 2.5%. If you retired at 20 years and your highest 36-month average is $56,000, the calculation looks like this:
(56,000 X 20) X 2.5% = (1,120,000) X 2.5% = $28,000
This system maxes out at 75%, which would be the equivalent of retiring after 30 years of service (30 X 2.5%).
The Blended Retirement System (BRS)
You will have access to matching contributions via the Thrift Savings Plan and mid-career retention bonuses. There is also a monthly annuity of 2% for every year you serve. So, 20 years gives you 40%, 25 years gives you 50%, and so on.
In almost all cases, these benefits count as taxable income at the federal level. However, many states choose not to include military retirement pay in state income taxes. Others tax this income with a partial tax, and others tax the income fully.
States that don't tax military retirement pay
These states don't tax military retirement pay, though they still have state income tax:
- Nebraska (special provisions apply for tax years prior to 2022)
- New Jersey
- New York
- North Carolina
- North Dakota
- West Virginia
If you live in one of these states, military retirees are encouraged to go to https://www.dfas.mil/RetiredMilitary/ to change their income tax withholding to zero.
States with other special tax provisions for military retirement pay
While they may not exempt military retirement pay from being taxed, some states have other special tax provisions:
- Colorado: Those ages 55-64 can exclude up to $20,000; ages 65+ can exclude up to $24,000
- Delaware: Taxpayers up to age 60 may exclude up to $2,0000 of military retirement pay; those 61 and older can exclude up to $12,500
- District of Colombia: Military retirement pay up to $3,000 may be excluded for individuals ages 62 or older
- Idaho: Up to $34,332 of qualified retirement benefits (including military retirement pay) may be exempt for single filers, or up to $51,498 for joint filers ages 65 or older, or disabled and ages 62 or older
- Kentucky: All military retirement pay is exempt from state income tax for those who retired prior to 1997; or, for those who retired after 1997, pay is subject to tax after exceeding $31,110 ($41,110 for taxable year 2017 and earlier)
- Maryland: Retirees are able to exclude the first $5,000 (or $15,000 if 55 and older) of their military pension benefits
- Oklahoma: Military retirement pay is exempt either up to 75% or $10,000, whichever is greater, but cannot exceed federal adjusted gross income
- Oregon: Military retirees may qualify for a "federal pension subtraction" to the extent it was earned before October 1, 1991. If all of your service was after October 1, 1991, your entire pension is taxable
- South Carolina: Military retirees with a minimum of 20 years of active duty may except up to $3,000 until age 65, after which an exemption of $10,000 applies
Keep in mind that tax codes can vary from state to state, and tax laws are subject to change. Additionally, there are some states that offer additional exemptions not specific to military retirement pay, but may include it. It may be helpful to work with a tax professional to ensure you stay up-to-date with the latest state tax codes and are filing appropriately.
States that fully tax military retirement pay
There are some states that have no specific state income tax exemption for military retirement pay, including California, Vermont, and Virginia. If you live in these states, you'll have to pay taxes on your military retirement.
States that don't tax personal income
These states do not require military members to pay state income tax on military retirement pay because there is no state income tax collected:
- New Hampshire (dividend and interest taxes only, phased out in 2021)
- South Dakota
- Tennessee (dividend and interest taxes only, phased out in 2021)
Again, check your own state's tax code for the most up-to-date and accurate information.
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