Tax-Friendly States for Military Retirement Pay

Retirement Pay

So you have spent the last 20+ years moving every 3-4 years, sometimes with your spouse and children in tow. You’ve worked hard. Deployed a lot and now it’s time to reap those benefits that are finally yours to get retirement pay. Hopefully, you’ve planned for your military retirement, and have some goals. But, before you decide where you’re going to settle down. Make sure you understand the taxes you will be responsible for when you retire from active duty service.

It is imperative to know these things when finally ‘hanging the towel’ on your life as a service member. Most active-duty members retire and still have a significant amount of work time left. Military personnel becomes vested after 20 years of service. Which for some, leave them getting out at the age of sometimes 42-45 years old. So moving to a civilian job almost seems natural. Now, it also depends on when you signed up and joined the United States Military.

In 2018, there were several changes done But what some do not understand is that the IRS views your retirement pay a pension, and taxes it as just that. Pension income is taxed as ordinary income, (less social security and medicare and Survivor Benefit Plan (SBP) are not taxable) so you will pay taxes on your military income according to your tax bracket. Tax codes and tax laws change from state to state and year to year.

We highly encourage you to seek professional tax advice and also speak to your Financial Advisor for more information. But besides federal taxes, you have state taxes to worry about. Today, we will be talking about tax-friendly states for Veterans and highlight some general information you should know about.

Disability Tax:

The U.S. Department of Veterans Affairs provides veterans upon retirement a disability status rating. This rating then determines how you qualify for benefits. The rating they provide you are scored on a scale from 10 percent disabled to 100 percent disabled. The way states tax disabled veterans varies. Check your state to see how you are affected if you are receiving disability pay.

The No Income Tax States:

These nine states do not withhold personal income tax at so veteran retirement pay is also not taxed. These states include:

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

***Tennessee and New Hampshire only tax income from dividends and interest, which does not directly impact veteran retirement pay *generally.

States Taxing Military Retirement Pay:

These eight states do not have a veteran retirement pay exemption from taxes. These states include:

  • California.
  • Montana.
  • New Mexico.
  • North Dakota.
  • Rhode Island.
  • Utah.
  • Vermont.
  • Virginia.

States That Do NOT Tax Military Retirement Pay:

These twenty states DO, however, have a state income tax that others pay.

  • Alabama
  • Arkansas
  • Connecticut
  • Hawaii
  • Illinois
  • Iowa
  • Kansas
  • Louisiana
  • Maine
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • New Jersey
  • New York
  • Ohio
  • Pennsylvania
  • West Virginia
  • Wisconsin

13 States With “Special Provisions” Or Other Consideration For Taxing Military Retirement Pay:

These 13 states have provisions that range from certain dollar amounts of your retirement pay are exempt from tax to specific ages that are eligible for military retirement pay exemption. There are also disability exemptions, special pay exemptions and the year in which you retired that may or may not affect what is taxed on a state level.

  •  Arizona
  •  Colorado
  •  Delaware
  •  District of Columbia
  •  Georgia
  •  Idaho
  •  Maryland
  •  Kentucky
  •  Indiana
  •  Nebraska
  •  North Carolina
  •  South Carolina
  •  Oregon
  •  Oklahoma

There is an entire page dedicated to Veteran taxes that the IRS provides as well to help.

For more helpful information regarding transitioning from Active Duty Military to civilian life and entrepreneurship, consider our PODCAST.

Joseph Crane

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