In the U.S, there are certain states that don’t tax military retirement pay. If you have just retired or are about to retire from the military, knowing the states that do not tax military retirement pay is useful. Today’s article will cover just that along with other essential, relevant information on the best tax-friendly states for military retirees. So, be sure to read until the end!
In short, there are 21 states that do not tax military retirement pay, which are Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Utah, and West Virginia.
Table of Contents
Details on Military Pay Tax Exemptions
1. States with Tax-Free Military Retirement Pay
The general range of military retirement pay for a military retiree is $30,000 to $70,000. The lower end is from $30,000 to $35,000 – typically for an enlisted member, while the higher end is from $60,000 to $70,000 for an officer. But this amount can still be taxed as a wage or a pension depending on the state taxes law where you reside as a retiree.
As mentioned earlier, 19 states in the U.S do not tax military retirement pay.
The states are Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Dakota, Ohio, and Pennsylvania.
Therefore, these are known as the most tax-friendly states for military retirees.
- Alabama: Both retired pay and survivor benefit plan for military retirees are tax-free.
- Arkansas: Military income, retired pay, and survivor benefit plan are all tax-free.
- Connecticut: Both retired pay and survivor benefit plan are tax-free. Military income is also tax-free if the retiree is stationed outside of Connecticut, has not visited for more than 30 days, or does not own a house in Connecticut.
- Hawaii: No tax for retired pay and survivor benefit plan.
- Illinois: Military income, retired pay, and survivor benefit plan are all tax-free.
- Iowa: All three are tax-free: military income, retired pay, and survivor benefit plan.
- Kansas: Both retired pay and survivor benefit plan for military retirees are tax-free.
- Louisiana: Military income up to $30,000 is not taxed if the retiree is stationed outside Louisiana for at least 120 consecutive days.
- Maine: Military income that is not earned in Maine is tax-free. The retired pay and survivor benefit plan are also tax-free.
- Massachusetts: Retired pay and survivor benefit plan are both tax-free.
- Michigan: Military retirees do not have to pay tax for military income, retired pay, and/or survivor benefit plan.
- Minnesota: All three are tax-free: military income, retired pay, and survivor benefit plan.
- Missouri: Any military income, retired pay, and survivor benefit plan are tax-free.
- New Jersey: Military income will not be taxed if the retiree does not live in New Jersey. However, retirees that live in BAH housing, government housing, barracks, or ships do not count. The retired pay and survivor benefit plan are tax-free.
- On top of that, there are deductions available for veterans discharged under honorable conditions. In particular, there is a one-time $6,000 tax drop in the year of discharge.
- New York: Military income is not taxed if the retiree does not have a permanent home in New York or outside New York for an entire year, or was in New York for less than 30 days. If the retiree was in a foreign country for 450 days during a 548-consecutive-days period. The retired pay and survivor benefit plan are tax-free terms.
- North Dakota: Military retirees do not have to pay tax for the retired pay and survivor benefit plan.
- Ohio: Retired pay and survivor benefit plan are tax-free, and so is military income if the retiree was stationed out-of-state.
- Pennsylvania: Like Ohio, the retired pay and survivor benefit plan are not taxed, and military income is tax-free if the retiree is not stationed in Pennsylvania.
2. States with Exempt Military Retirement Pay
However, aside from these states, there are states that have special tax treatment. There are some states that don’t tax military pensions.
Arizona, Colorado, Delaware, Georgia, Idaho, Indiana, Kentucky, Maryland, Nebraska, New Mexico, North Carolina, Oklahoma, Oregon, Rhode Island, and South Carolina, are among the states with partial exemptions. Now, let’s look at each state in detail!
- Arizona: This state’s policy is that the first $3,500 of a person’s military retirement is exempted from tax.
- Colorado: Retirees from the military that are 55 years old to 64 years old leave aside up to $20,000 in one tax year, and those 65 years old or over can leave aside up to $24,000.
- Delaware: Retirees under 60 years old can exclude up to $2,000 of military retirement tax, while those 60 years old or above can exclude up to $12,500.
- Georgia: Retirees over the age of 62 or are permanently disabled may be able to exclude $4,000 of military retired pay.
- Idaho: Military retirees at 65 years old or above or disabled retirees over 62 do not have to pay tax.
- Indiana: For 2019, up to $6,250 and 25% of retired pay is not taxed. For 2020, the percentage value increased to 50%. Now, in 2021, it is 75%. The years following 2021, it will be 100%.
- Kentucky: Military retirees are not taxed up to $31,110 but in certain cases, you may be able to exclude more.
- Maryland: Retirees are not taxed the first $5,000. When the taxpayer reaches 55 years old, the tax-free amount is $15,000.
- Nebraska: Retirees at 67 years old and over are exempted from tax payment for 15% of the retired pay for all taxable years. From 2020 onwards, military retirees will only be taxed for 50% of his/her retired pay.
- New Mexico: Military retirees who are low-income taxpayers and are 65 years old or older may exclude up to $8,000. Additionally, he or she can phase out slowly at $28,500 as a single filer or $51,000 as a joint filer. Also, those who are 100 years old or older are fully exempt.
- North Carolina: Military retirees are not taxed if they served 5 years in active duty before the 12th of August, 1989.
- Oklahoma: Military retirees are specially exempted for $10,000 or the greater of 75% of the retired pay.
- Oregon: Retirees may deduct some of his/her retirement pay if they were in service before the 1st of October, 1991.
- Rhode Island: Military retirees can be exempted for up to $15,000 if they have reached full social security retirement age and have a federal AGI less than $83,450 as a single payer or $104,350 as a joint payer. The latter refers to married people filing jointly.
- South Carolina: Retirees younger than 65 years old do not have to pay tax for up to $14,000 and those at 65 years old do not have to pay tax for up to $27,000.
3. States with No Tax Exemptions for Military Retired Pay
The states that do not provide any tax exemptions are California, Vermont, and Washington DC.
- California: 100% of a military retiree’s military pension income as well as other pensions from private, local, state, or federal sources are taxed, and it does not matter where the military retiree was stationed and served while on active duty. The highest tax rate is 13.3% on over $1 million for single filers and $1,250,738 for joint filers.
- Vermont: Like California, 100% of a military retiree’s military pension and retirement pay is taxed. The highest tax rate in the state is 8.75%, which is more than $204,000 for single filers and $248,350 for joint filers.
- Washington DC: There are no tax breaks offered in this state, even though there was a $3,000 exclusion for military pensions and government pensions before 2015. Today, the highest tax rate in Washington DC is 8.85% on over $1 million of taxable income.
Two other states that are considered “unfriendly” to military retirees are Montana and Utah. The former has some tax exemption but not for those with very high pension and income. Veterans with $438,605 or more federal adjusted gross income will not be eligible for the 2020 maximum exemption of $4,370.
For taxable years beginning in 2021, the exemption will be repealed. However, the tax bracket and rate will be adjusted to rates between -4/7% and 6.5% from 2024 onwards.
The latter has a flat tax rate of 4.955. There are no special tax breaks while, at the same time, the retirement income tax credit is limited. Previously, retirees at 65 years old and older were allowed to get a tax credit of up to $450/person with the credit phasing out at 2.5 cents/dollar.
However, starting this year, a new system is in place. The credit is based on the product of the Utah income tax rate (4.85%) and the amount of retirement pay that is in the federal adjusted gross income.
4. Remaining States
The remaining states that we have not mentioned are as follows.
- Tennessee & New Hampshire: No income taxes, only taxes on dividends and interest.
- Texas, Nevada, South Dakota: No state income taxes.
For more, watch this video on Youtube.
So, now you have information about the states that don’t tax military retirement pay as well as states with special tax exemptions. Hopefully, you have everything you need to plan your finances going into military retirement. You might as well be a tax professional!
If you thought this was informative, be sure to share them with other readers. Also, if you have any other questions on military retirement income taxes, you can comment below!
I am Everett Bledsoe, taking on the responsibility of content producer for The Soldiers Project. My purpose in this project is to give honest reviews on the gear utilized and tested over time. Of course, you cannot go wrong when checking out our package of information and guide, too, as they come from reliable sources and years of experience.