States That Don’t Tax Military Retirement Pay

Military veterans should consider retiring to one of these states if they want to lighten their tax burden

Military veterans should consider retiring to one of these states if they want to lighten their tax burden

Many people intention plan on retiring in a state where they can get the most bang for their buck, and military veterans are no exception. For them, this often involves finding a state that doesn’t tax military retirement pay, or else offers a generous exemption.

Here’s a breakdown of how military retirement pay is treated by the tax codes of the various states. In those states not included, military retirement pay is fully taxable.

States with No Income Tax

At the top of the list are the nine states that have no state income tax at all. By default, military retirement pay is completely exempt from tax. These state are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Note: New Hampshire and Tennessee both tax interest and dividends. For most taxpayers, however, this would constitute a relatively small portion of total income.

States That Exempt Military Retirement Pay

These states do have an income tax, but they exempt military retirement pay entirely. These states are:

  • Alabama
  • Hawaii
  • Illinois
  • Kansas
  • Louisiana
  • Massachusetts
  • Michigan
  • Mississippi
  • New Jersey
  • New York
  • Ohio
  • Pennsylvania
  • Wisconsin

The Special Cases

Finally there are several states that do not offer a full exemption of military retirement pay but do offer some form of preferential treatment.

  • Arizona – Military retirement pay is not exempt, but you can subtract up to $2,500 for military pensions in arriving at Arizona taxable income.
  • Arkansas – Retired military personnel are entitled to a $6,000 exemption.
  • Colorado – Persons who were 55-64 years of age as of December 31 may exclude up to $20,000 of their military retirement benefits received during the calendar year. Persons who were 65 years of age or older as of December 31, may exclude up to $24,000 of their military retirement benefits received during the calendar year.
  • Connecticut – Connecticut exempts 50% of federally taxable military retirement pay from state income tax.
  • Delaware – Individuals under the age of 60 can exclude up to $2,000 of military retirement pay and individuals 60 and over can exclude up to $12,500.
  • Idaho – Retirement benefits to a retired member of the military 65 or older, or disabled and age 62 or older are deductible. The amount deducted must be reduced by retirement benefits paid under the Federal Social Security Act or the Tier 1 Federal Railroad Retirement Act. The maximum amounts that may be deducted are $41,814 for married filing jointly and $27,876 for single. The amount varies from year to year.
  • Indiana – You can deduct the actual amount of retirement pay received or $5,000, whichever is less, if you meet certain conditions.
  • Iowa – Up to $10,000 (joint returns), and up to $5,000 (other returns) of military retired pay and SBP benefits may be excluded for those who are 55 years old and older, disabled, and for surviving spouses.
  • Kentucky – If you retired in 1997 or before, all of your retired military pay is exempt from tax. If you retired after 1997, your pay is subject to state tax if it exceeds $41,110.
  • Maryland – Military retirees are exempt from Maryland income tax on the first $5,000 of their retirement income. In addition, military retirees who are over the age of 65, totally disabled, or who have a spouse who is totally disabled, receive an additional subtraction.
  • Missouri – For the tax year beginning January 1, 2012, 45% of a military pension income will be exempt from MO state tax. This tax deduction will increase 15% annually until January 1, 2016 when all military pension income will be tax free.
  • Montana – The first $3,600.00 of retired military pay is exempt from income tax.
  • North Carolina – Retirees with five years of service as of August 12, 1989 are fully exempt. For everyone else, military retired pay is taxed, but up to $4,000 ($8,000 for married filing jointly) may be excluded.
  • Oklahoma – Each individual may exclude 75% of their retirement benefits or $10,000, whichever is greater, but not to exceed the amount included in the federal adjusted gross income.
  • Oregon – If you receive military retirement pay, you may qualify for a federal pension subtraction. If you are a special-case Oregon resident, your pension remains taxable as Oregon-source income.
  • South Carolina – Any person retired from the uniformed services is allowed an exemption from SC income tax of $3,000 until age 65. At age 65 $10,000 of retirement pay is exempt.
  • West Virginia – An individual, regardless of age, may deduct up to $2,000 of benefits received from military retirement.

While you’re planning ahead for the future, don’t forget about filing this year’s state and federal taxes. You can do that right here on RapidTax.

Photo via DVIDSHUB on Flickr.

Tags:

This entry was posted on Monday, March 18th, 2013 at 3:25 pm and is filed under Tax Tips.

46 Responses to “States That Don’t Tax Military Retirement Pay”

  1. David Beemer says:

    You forgot NC!

    • Tax Advisor says:

      Hi David,

      North Carolina is included under Special Cases, but still a good place for vets to retire.

      • Cyndi says:

        How is NC a good place for Vets? My husband Are contemplating not retiring to NC due to changes in their tax laws. He as served sine Sep, 1985 and falls 1 year shot of the Aug, 1989 cut off. I will continue to work full time while my husband is retired. Can you please show me how this it will benefit us to retire in NC. Other states we are considering include GA or FL.

        • Tax Advisor says:

          Hi Cyndi,
          North Carolina has special military retirement pay exemptions. NC allows a full tax exemption for retirees with five years of service as of August 12, 1989; otherwise a deduction of up to $4000 ($8000 for joint filers).

          • Cyndi says:

            Thank you for your response.

            But that means that out of $100K we would only be taxed on $92K, correct? My issue is that is a much lower vantage point than the previously tax exempt status offered in NC for military retirees.

            I’m really disappointed with the changes. I was trying to appreciate your earlier comments, I’m failing to find the benefit of this new tax system. Are there other tax benefits that might offer pull for retiree in NC?

            Thanks in advance.

            Cyndi

  2. John says:

    What about GA? I’m in the Army and thinking about retiring in GA.

    • Tax Advisor says:

      Hi John,

      As far as I’m aware, there’s no special allowance made for military retirement pay. However, Georgia does have a fairly generous retirement income exclusion that applies to everyone (as opposed to members of the military specifically). For the 2012 tax year, the maximum retirement income exclusion is $35,000 for taxpayers who are (A) 62-64 years old, or (B) less than 62 and permanently disabled. The retirement exclusion is $65,000 if the taxpayer is 65 or older.

  3. Glenn says:

    On top of military tax exemption, are there other “state financial benefits” that some states offer over others that are military tax exempt?

    • Tax Advisor says:

      Hi Glenn,

      Yes, pretty much every state has a unique tax situation that could offer you more benefit depending on your personal tax situation. You’ll have to do some investigating to figure out which state is best for you.

  4. Tony says:

    I currently am a New York resident, active duty and ready to retire. I have a house in N.C. and looking to retire there. Question, will my military retirement pay be exempt still if I live in N.C. and I’m still considered a New York resident? Also what source can I use to look up other benefits to living in NC as a military retiree? Thank you.

  5. Lee Doyle says:

    I am 71 years old and have a military retired income of 36,000 yearly, 25,000 social security and 13,000 civil service. I own a home in Arizona. Will I be taxed on all of my retirement income
    Thank You
    Lee Doyle

  6. Beth says:

    My husband is 56 and on military disability since 2002. He receives a 1099r with code 3 disability in the code box. Is the income fully taxable to Louisiana state ? It is not his retirement but his disability that he receives.
    Some one told me it goes on 4 as retirement income and someone said 49E. ??????
    Thank you

    • Tax Advisor says:

      Hi Beth,
      According to the IRS, you do not include military and government disability pensions as income. This means, the disability is tax-free. There is more information from the IRS website. Scroll down to the section titled “Military and Government Disability Pensions” after going to the IRS website; http://www.irs.gov/publications/p907/ar02.html The state of Louisiana follows these same guidelines.

  7. Debby DuBay says:

    I’m retired from active duty on full pension. Does the state of VT offer any military tax exemptions? Thank you!

  8. Tight says:

    You all seem to be missing the point here! The tax rate is a multiple of the income tables !

    Ru all really that stupid?

  9. Mark says:

    My tax accountant has never prepared a military retired tax return before. She seems to think that I will have to pay a penalty for some kind of (under 59 1/2 age) rule. I’m confused on what she is talking about. Can you please advise.Thank you.

    • Tax Advisor says:

      Hi Mark,
      For retirement plans like an IRA, you must wait until your 59 and a half to withdrawal from the retirement account without having penalties assessed. If you withdrawal from your IRA retirement plan before this age of 59 and a half, you are subject to a 10% penalty on top of your ordinary income taxes. If this is your case, it sounds like your accountant is correct.

      It’s good to know a few tips. First, there are some exceptions to this 10% penalty that are worth investigating on the IRS website. Second, if you retired early and withdraw IRA funds before 59 and half, there is a plan called SEPP which allows you to set up a plan to avoid the 10% penalty. It’s set up through the IRS and is based off of your current age, your life expectancy and something titled the “Applicable Federal Mid-term Rate”. They (the IRS) will tell you an exact amount (without a penny over or under) of how much you can withdraw each year without incurring a penalty. The link to this information on the IRS website is as follows; http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

      How old are you Mark? In the big picture, if you are over 59 and half, you should not be penalized for withdrawing from your retirement and should definitely point this out to your accountant. Also, when filing your taxes in the future, our accountants can help you with any military related tax questions you have.
      Best of luck!!

  10. Mark says:

    Hi Tax Advisor;

    Thank you for the information. I am 46 with no other retirement plans. The information you provided was exactly what I had already informed my accountant of. The fact that I only get a military retirement check and C & P, with no other types of retirement plans such as IRA, Roth, or 401k, I’m understanding (according to your response) the 59 and a half rule does not apply in my situation.

    Thanks again!

  11. Kristin says:

    Can you expand on the SC special case of $3K and $10K? Does that mean $3K more or less? If my ret pay is say $1700/mo give me an example with my specifics.
    Thanks

    • Tax Advisor says:

      Hi Kristin,
      Sure… So if you are receiving military retirement from 20 or more years of active duty and are under the age of 65, then when you go to file your taxes, you may exempt $3000 of your retirement income, meaning $3000 won’t be taxed. That means if it already was taxed, after listing it on your tax return as an exemption, you’ll most likely receive a tax refund.
      The same applies to $10,000 of your military retirement income if you are over the age of 65. That means $10,000 of it won’t be taxed.

  12. Dennis says:

    I am considering Tennessee. You identify them as not having a state income tax, but their department of revenue site says they have had an income tax since 1929.

    • Tax Advisor says:

      Hi Dennis,
      In the big picture, there’s no state income tax in Tennessee. However, the state does levy a tax on interest and dividend income over $1,250 (called the Hall Tax). So yes they do collect income taxes, but not on income other than interests and dividends.

  13. Angela says:

    I am a Texas resident but am on active duty stationed in SC. I want to retire but will not stay in SC, I am moving to Florida after I retire. Will I be charged SC taxes on my retirement if I retire in SC and then move to Florida?

    • Tax Advisor says:

      Hi Angela,
      If you are a Texas resident you will not be taxed for your retirement. If you become a resident of SC then you will be taxed for your retirement income received.

  14. heath says:

    I recieve military retirement and VA disability (100%) is it taxed in Florida. Under 65

  15. James says:

    I am a NC resident and fall under Special Cases. However, I have been paying Federal Income Tax. How do I have this discontinued and am I entitled to a refund.

    • Tax Advisor says:

      There’s no way in avoiding federal taxes, unless you falls below the IRS filing threshold for your age and filing status. The IRS website has a complete list of who does and who doesn’t have to pay federal taxes.

  16. Sean says:

    I recieve military retirement and VA disability (100%) is it taxed in Maryland. Under 65

    • Tax Advisor says:

      Hi Sean,
      According to Maryland state taxation laws, if you receive military retirement income, you will be able to subtract up to $5000 of your military retirement income from your federal adjusted gross income before determining your Maryland tax.
      If you are totally disabled, you may qualify for Maryland’s maximum pension exclusion of $27,100.

  17. Mike says:

    I am a Texas resident currently serving overseas. I plan to retire upon completion of this assignment. I own a home in CA., where I spent 13 years prior to moving overseas and am trying to decide whether or not to retire there. What can I expect from the state of CA. as far as taxes on my retirement…………potential back pay do to domicile status, tax rate, etc.

    • Tax Advisor says:

      Hi Mike,
      Thanks for serving our country. Regarding your retirement, CA military retirement pay taxation follows the same rules as the federal taxation does for military retirement pay taxation.

  18. Angela says:

    we are looking to retire in 2 yrs and thinking on Tennessee, Ohio and Florida. which of the three would be the best for us( tax wise ). hubby will be continuing to work and draw his retirement….. thank you

  19. Carol Kellett says:

    What about Minnesota?

  20. Beth Shorts says:

    I am the spouse of a miltary retiree. We live in Maryland. I am disabled, but need to know what constitutes “totally disabled” for tax purposes and how does one go about proving that to the tax authorities? Also, where can we get information on the Maryland income tax exemption on the first $5000 of his retirement income?

    • Tax Advisor says:

      Hi Beth,
      The IRS defines totally disabled as a permanent disability that prevents you from “engaging in consistent employment”. It does not include activities that relate to ordinary personal and household maintenance. You’ll have to obtain a statement from your physician certifying that you are totally disabled in order to prove it.

      If you are 65 or older and totally disabled, you may qualify for Maryland’s maximum pension exclusion of $27,800 under certain conditions.

      Regarding the $5000 exemption on the military retirement income, the army benefits page for Maryland lists all the information you’ll need. Here is the link; http://myarmybenefits.us.army.mil/Home/Benefit_Library/State__Territory_Benefits/Maryland.html

      When filing your taxes on RapidTax, our application is designed to help you easily file your taxes if you are a military retiree, or spouse of one, if disabled, etc.

  21. James Spangler says:

    I live in Pennsylvania and am receiving military retirement pay. Do I have to pay state income taxes on this money?

    • Tax Advisor says:

      Hi James,
      According to Pennsylvania income tax law, as long as you retired from the military with either years of service or age, your retirement income is not taxable.

  22. Rick says:

    I’m retiring early, 57, single and considering moving from Iowa to St. Croix. What are the tax rates for US citizens there on miltiary retirement pay and VA disability pay?
    Thanks

  23. Charlie Dean says:

    I qualify for the Retired military pay income exemption in NC. I served 21 years from 1966-1987. What is the correct distribution code for box 7. DFAS assigned code 7 for this box, indicating a normal distribution. Unfortunately, this code adds that distribution to my state tax return and balloons the amount due.

Leave a Reply