Military retirement pay based on age or length of service is considered a taxable income for Federal income taxes and state income taxes in some states. Both military disability retirement pay and veteran's benefits, including service-connected disability pension payments, are typically excluded from taxable income.
Understanding military retirement income taxes helps one better plan their retirement years, as these taxes can have a large impact on one's financial plans and goals.
Generally, to be eligible for military retirement benefits, one needs to serve for 20 years. Military retirement pay is not considered earned income, and no Social Security is withheld.
Laws vary greatly between states. Some states do not tax military retirement pay, and some states have specific tax exemptions, such as exempting taxation up to a certain amount or being exempt depending on age or year of retirement. In Arizona, for example, up to $2,500 in military retirement pay can be exempted from taxable income. In Kentucky, military pensions are fully exempt if the person retired before 1997.
The states can be divided into four categories: no state income tax; exempts military pension income from state taxes; offers special tax treatments for military pensions, and treats military retirement pay as ordinary taxable income.
The following states have state income tax but exempt military retirement pay:
- New Jersey
- New York
- West Virginia
The following states have no state income tax and, therefore, do not tax military retirement pay:
The following states partially tax military retirement:
- Arizona: Up to $3,500 is exempt.
- Colorado: Up to $24,000 is exempt for 65 and up; $20,000 for 55-64; $7,500 under 55 (incrasing to $10,000 in 2021 and $15,000 in 2022 and 2023).
- Delaware: Up to $2,000 examept for under 60 and up to $12,500 exampt for 60 and older.
- Georgia: No specific exemption. Taxpayers 62-64 (or disabled) can exclude up to $35,000, and 65 and older can exclude up to $65,000.
- Idaho: Up to $34,332 of qualified retirement benefits may be exempt for single filers ($54,498 for joint filers) 65 and older (or 62 and disabled).
- Indiana: Up to $6,250 is exedmpt, plus 50% of the excess in 2020, 75% in 2021, and 100% in 2022 or later.
- Kentucky: All military pay is exempt if you retired in 1997 or earlier. Otherwise, up to $31,110 in a pension can be excluded.
- Maryland: Up to $5,000 is exempt up to 55 years old, and up to $15,000 if 55 and older.
- Montana: Up to $4,370 of pension and annuity is exempt; however, the amount phases out if adjusted gross income was $6,420 or higher in 2020.
- Nebraska: Military retirees can select either a 40% military retirement income exclusion for seven consecutive tax years or a 15% exclusion for all tax years beginning at 67. Starting in 2022, all military retirees may exclude 50% of military retirement benefits.
- New Mexico: Military retirement is taxable as income, but low-income taxpayers 65 and older may exempt up to $8,000 of income from New Mexico taxes. As income increases, the exemption phases out and disappears for single filers making more than $28,500 (joint filers making more than $51,000). All income is exempt for taxpayers 100 or older.
- North Carolina: If the taxpayers had five or more years of service as of August 12, 1989, military retirement pay may be exempt.
- Oklahoma: up to 75% or $10,000 is exempt, whichever is greater.
- Oregon: Military retirement is taxable for service after October 1, 1991, and is exempt for service before that date.
- Rhode Island: Up to $15,000 of retirement income is exempt for retirees who reached their full Social Security retirement age and whose federal adjusted gross income is less than $83,450 for single taxpayers ($104,350 for married people joint filing)
- South Carolina: Up to $17,500 for 65 and under who have other earned income ($3,000 otherwise). Up to $30,000 is exempt for 65 and older, regardless of other income.