The good news for veterans is that more and more states are choosing not to tax military retirement pay. Some states don’t have income tax at all, while other states only partially tax military retirement pay. As of 2023, only California and the District of Columbia fully tax military retirement pay.
While the United States federal government has recently made it easier for some people to save for retirement with the passing of the Secure 2.0 Act, military retirement pay is still taxed. However, many states do not tax military pension income, so if you’re a veteran, you may be able to save some money, depending on where you live.
Additionally, some states that used to partially tax military retirement have voted to eliminate the tax altogether, starting with the 2022 tax year. So if you take taxes into account when deciding where to retire, you might want to avoid San Diego or Palm Springs in favor of an area that no longer taxes military retirement pay, like Phoenix.
Let’s take a closer look at what military retirement pay is and which states do not tax this income as of the 2022 tax year.
What is military retirement pay?
Citizens who serve in the U.S. military — including the Army, Air Force, Marine Corps, Navy, and Coast Guard — receive a monthly annuity for life after fulfilling 20 years of service. While this income is taxed on the federal level as a pension, it may or may not be taxed on a state level, as each state takes a different approach in regard to taxing military retirement pay.
State taxes on military retirement pay will fall under one of the following four categories:
- States with no state income taxes at all
- States that don’t tax any military retirement pay
- States that partially tax military retirement pay
- States that fully tax military retirement pay
States that don’t tax military retirement pay
Because there have been so many changes to military retirement income taxes in recent years, we will break down each category in further detail to help you understand which states do and don’t tax military retirement pay.
States that have no state income tax
Eight states do not have state income tax at all, so your military retirement pay will not be subject to state income tax by default. The following states do not have state income tax:
- South Dakota
A ninth state, New Hampshire, only requires residents to pay state income tax on dividends and interest income.
States that specifically do not tax military retirement pay
As of the 2022 tax year, six states have eliminated taxes on military pension income: Arizona, Indiana, Nebraska, North Carolina, Oklahoma, and South Carolina. Rhode Island also will not tax these pensions as of the 2023 tax year.
Along with the states listed above, the following 21 states already did not tax military retirement pay:
- New Jersey
- New York
- North Dakota
- West Virginia
Altogether, this brings the total number of states that do not tax military retirement pay to 37.
States that partially tax military retirement pay
There are 12 states that tax military retirement income but offer some kind of exemption or exclusion. While each state has different requirements for these exemptions, you will generally need to meet an income requirement or an age requirement (such as being 55 or 65). Be sure to check with your state or consult a tax professional to learn more about the laws that apply to you.
Here is a breakdown of the states that only partially tax military retirement pay:
If you are under the age of 55, $15,000 of your retirement pay is exempt from taxes. If you are between the ages of 55 and 64, that exemption increases to $20,000, and if you are 65 or older, it increases further to $24,000.
If you are under the age of 60, you can exclude up to $2,000 of your pension income from your taxes. If you are 60 or older, you can exclude up to $12,500.
Beginning with the 2022 tax year, taxpayers under the age of 62 can exclude $17,500 of military retirement income from their taxes. If you have more than $17,500 of earned income, you can exclude an additional $17,500. Taxpayers between the ages of 62 and 64 or who are disabled can exclude up to $35,000, and taxpayers 65 and older can exclude up to $65,000.
As of the 2022 tax year, residents can deduct the following amounts of military retirement pay from their taxes:
- Single — age 65 or older = $40,140; age 62 or older and disabled = $40,140
- Married, filing jointly — age 65 or older = $60,210; age 62 or older and disabled = $60,210
Kentucky allows an exclusion of up to $31,110 ($41,110 for the 2017 taxable year and earlier) for all taxable pension income that is included in your federal adjusted gross income.
If you are under the age of 55, you will be able to subtract up to $5,000 of your military retirement pay from your federal adjusted gross income. If you are between 55 and 65, you can subtract up to $15,000, and if you are over 65 or are totally disabled, you are entitled to a maximum pension exclusion of $34,300.
You can exclude up to $4,640 of your military retirement pay, but your exclusion is reduced by $2 for every dollar by which your 2022 federal adjusted gross income exceeds $38,660. If you file jointly with your spouse, you can exclude the lesser of each spouse’s retirement income or $4,640, up to a maximum of $9,280.
New Mexico has raised its income tax exemption to $10,000 of military retirement income as of the 2022 tax year. After 2024, this exemption will increase to $30,000 of military retirement income.
If your federal employment occurred before October 1, 1991, you can subtract that portion of your federal pension income. If you were age 62 or older at the end of the tax year and you have an annual household income of less than $22,500 ($45,000 for joint filers), you may qualify for a retirement tax credit. You will find a detailed formula to calculate this credit on your tax return.
To figure out your military retirement tax credit, simply multiply your taxable military retirement pay by 0.0485.
When calculating your taxes, you can exclude the first $10,000 of retirement income earned each year from military pensions.
Virginia recently passed a new law stating that up to $10,000 in military retirement is tax-free for taxpayers ages 55 and older. This number will increase by $10,000 each year until 2025, when up to $40,000 will be exempt.
States that tax military retirement pay
Adding the 12 states that offer partial exemptions for taxes on military retirement to the 37 states that don’t tax military retirement pay at all will give you a total of 49 states. This means that as of the 2022 tax year, the only regions in the United States that fully tax military retirement pay are California and the District of Columbia.
It’s worth noting that the District of Columbia used to offer a tax exemption of $3,000 for military retirement pay, but this has since been abolished. A bill was introduced in 2021 to restore this exemption and increase it to $10,000, but unfortunately, it failed to pass.
What is the best state for military retirement?
It’s hard to pinpoint a single state as the best for military retirement because there are 37 states that do not tax military retirement pay at the state level. That said, the following nine states are good candidates, as they have no state income tax and do not tax Social Security benefits, military retirement income, pensions, 401(k)s, or IRAs:
- New Hampshire
- South Dakota
What is the average military retirement income?
Veterans receive different retirement plans depending on when they served in the military. Your years of service will determine your monthly pension, but in general, you can expect around half of your military income.
Can my military retirement be tax-free?
Your military retirement is subject to federal income taxes but may not be subject to state taxes. Almost all states either partially or fully exempt military retirement pay. So unless you live in California or Washington, D.C., you will receive some sort of tax break on your military retirement pay.
Which state is the most veteran friendly?
If you consider the cost of living in the nine states with the most tax benefits, Wyoming and South Dakota top the list of the best states for veterans to retire.
- U.S. citizens who serve in the Army, Air Force, Marine Corps, Navy, or Coast Guard will receive a monthly annuity for life after 20 years of service.
- This military retirement pay is subject to federal income taxes, but it may be exempt from state taxes, depending on where you live.
- There are nine states with no state income tax at all and 28 states that specifically do not tax military retirement pay (if you count Rhode Island starting in the 2023 tax year).
- Additionally, 12 states offer partial tax deductions or exclusions for military retirement pay.
- As of the 2022 tax year, only California and the District of Columbia fully tax military retirement pay.
As is evident from the multiple updates in 2022 alone, tax laws change fairly frequently. If you’re confused about your state’s tax laws, it’s best to consult a tax professional to help you with your tax return. Not sure where to start your search? Use SuperMoney’s comparison tool to find the best tax preparation services for your needs!
View Article Sources
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- Retired Service Members – Colorado Department of Revenue
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- 2022 Montana Form 2, Individual Income Tax Instructions – Montana Department of Revenue
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