State Tax Exemptions for Military Retirement Pay in the United States

Introduction

Military service members and veterans often face unique financial challenges that can be exacerbated by state tax laws. This article aims to provide a comprehensive overview of which states exempt military retirement pay and which have partial exemptions or full taxability. Understanding these differences can help determine which state offers the most favorable tax environment for military retirees.

States That Fully Exempt Military Retirement Pay

Several states allow retirees to enjoy tax exemptions on their military pensions, allowing them to keep more of their hard-earned income. Here is a list of those states:

Alabama: Exempt from state income tax. Alaska: No individual income tax. Arkansas: Exempt. Connecticut: Exempt. Florida: No individual income tax. Hawaii: Exempt. Illinois: Exempt. Iowa: Exempt. Kansas: Exempt. Louisiana: Exempt. Maine: Exempt. Massachusetts: Exempt. Michigan: Exempt. Minnesota: Exempt. Mississippi: Exempt. Missouri: Exempt. Nevada: No individual income tax. New Hampshire: No individual income tax except for dividends and interest. New Jersey: Exempt. New York: Exempt. No Dakota: Exempt. Oregon: No state taxes on military pension (note that social security is not usually included in this exemption). Pennsylvania: Exempt. South Dakota: No individual income tax. Tennessee: No individual income tax except for dividends and interest. Taxes on dividends and interest are being phased out and will be eliminated entirely starting Jan. 1, 2021. Texas: No individual income tax. Washington: No individual income tax. West Virginia: Exempt. Wisconsin: Exempt. Wyoming: No individual income tax.

States With Partial Tax Exemptions for Military Retirement Pay

Some states allow a partial exemption for military retirement pay, which can significantly impact your financial situation. Here is a breakdown of these states:

Arizona: Up to $3500 is exempt. Colorado: Up to $24,000 is exempt for retirees age 65 and older, increase to $10,000 in 2021 and $15,000 in 2022 and 2023. For those age 55 to 64, up to $20,000 is exempt, and for those under 55, $7,500 is exempt. Delaware: Up to $2,000 is exempt for taxpayers under age 60, and up to $12,500 is exempt for taxpayers 60 and older. Georgia: No specific military exemption, however, taxpayers 62 to 64 or disabled can exclude up to $35,000 of retirement income, and those 65 and older can exclude up to $65,000. Idaho: Up to $34,332 of qualified retirement benefits, including military retirement pay, may be exempt for single filers and up to $51,498 for joint filers who are 65 or older or at least 62 and disabled. Indiana: Up to $6,250 of military retirement income is exempt, plus 50% of the excess in 2020, 75% in 2021, and 100% in 2022 or later. Kentucky: Full military retirement pay is exempt if retired before 1997, otherwise, those retiring after 1997 can exclude up to $31,110 in pension income and use "Kentucky Schedule P" to compute any additional exclusion above $31,110. Maryland: Up to $5,000 of military retirement income is exempt for taxpayers up to age 55, and up to $15,000 is exempt for taxpayers 55 and older. Montana: Up to $4,370 of pension and annuity income, including military retirement pay, is exempt but may be phased out if the adjusted gross income is $36,420 or higher in 2020. Nebraska: Military retirees can elect either a 40% exclusion of military retirement income for seven consecutive tax years or a 15% exclusion for all tax years beginning at age 67. Starting in 2022, all military retirees may exclude 50% of their military retirement benefits. New Mexico: Taxable as income; however, low-income taxpayers 65 and older can exempt up to $8,000 from New Mexico taxes. The exemption gradually phases out as income rises and disappears for single filers with federal adjusted gross income over $28,500 and joint filers over $51,000. Also, all income is exempt for taxpayers who are 100 or older. North Carolina: Military retirement pay may be exempt if the taxpayer had five or more years of service as of Aug. 12, 1989. Oklahoma: Up to 75% of military retirement income or $10,000, whichever is greater, is exempt. Rhode Island: Up to $15,000 of retirement income, including military pensions, is exempt for retirees who have reached their full Social Security retirement age and whose federal adjusted gross income is less than $83,450 for single taxpayers and $104,350 for married people filing jointly. South Carolina: Up to $17,500 is exempt for military retirees under age 65 who have other earned income, $3,000 otherwise. Up to $30,000 is exempt for military retirees 65 and older regardless of other income.

States That Fully Tax Military Retirement Pay

Lastly, some states fully tax military retirement pay, leaving retirees with less disposable income. Here are those states:

California: Taxable as income. District of Columbia: Taxable as income. Utah: Taxable as income; however, taxpayers age 65 and older may qualify for a retirement credit of up to $450 based on income. Vermont: Taxable as income. Virginia: Taxable as income, except for Congressional Medal of Honor recipients.

Conclusion

Understanding state tax exemptions for military retirement pay can greatly impact your financial well-being. By choosing the most favorable state to live in, you can maximize your retirement income and plan accordingly. Whether it's a full exemption or a partial one, analyzing each state's policies can help you make an informed decision that aligns with your financial goals.