When it comes to military retirement pay, understanding tax implications can be confusing and frustrating.
But don’t worry, I’ve got your six!
If you’re receiving regular military retirement pay, you’re likely aware that it’s treated as taxable income by the IRS.
However, there are significant tax breaks and exclusions available for those who receive military disability retirement pay or Veterans’ benefits.
These exemptions could save you thousands of dollars each year, but understanding how to maximize these benefits requires knowing the details.
In this article, I’ll break down what’s taxable, what’s not, and how to ensure you’re keeping as much of your hard-earned retirement pay in your pocket as possible.
Table of Contents
Summary of Key Points
- Military retirement pay based on age or length of service is treated as taxable income by the IRS, meaning it must be reported on your federal tax return.
- Military disability retirement pay and Veterans’ benefits can be excluded from taxable income if they meet certain criteria, such as being combat-related or connected to a service-related disability.
- Contributions to the Survivor Benefit Plan (SBP) are excluded from taxable income, and military retirement pay is not subject to Social Security (FICA) taxes since it’s not considered earned income.
- Veterans with a retroactive VA disability determination can exclude the related portion of retirement pay from taxable income and may file amended tax returns to claim refunds for taxes paid during the retroactive period.
Overview of Military Retirement and Taxes
Military retirement pay based on age or length of service is taxable income for federal income taxes.
This means that if you’re receiving regular military retirement pay, it must be reported on your federal tax return.
However, if you’re receiving military disability retirement pay or certain Veterans’ benefits, those may be excluded from your taxable income, depending on your specific circumstances.
Click here for a detailed explainer of the Military’s Blended Retirement System.
VA Service-Connected Disability
If you have a service-connected VA disability, you may be eligible to exclude some or all your military disability retirement pay and Veterans’ benefits from your federal taxable income.
This is a great benefit that can significantly reduce your overall tax burden.
Key Benefits Breakdown of Retired Military Pay
#1. Military Retirement Pay
Military retirement pay based on age or years of service is fully taxable at the federal level, and some states may also tax it.
You’ll need to include this income when filing your taxes.
However, if you’re paying into the Survivor Benefit Plan (SBP), those contributions are excluded from your taxable income.
Additionally, military retirement pay is not subject to Social Security (FICA) taxes because it is not considered earned income.
#2. Military Disability Retirement Pay
Military disability retirement pay is not taxable if:
- You were entitled to receive disability payments before September 25, 1975.
- You were serving or under a binding commitment to join the military by September 24, 1975.
- You are receiving payments due to a combat-related injury (e.g., injuries from armed conflict or hazardous duty).
- You can also exclude your disability retirement pay if you would qualify for VA disability compensation.
If you have not applied for VA benefits, you can still exclude the amount you would have received from the VA from your taxable income.
#3. Veteran Benefits
The following Veterans’ benefits are not taxable:
- VA disability compensation and VA pension benefits.
- Education, training, and subsistence allowances.
- Grants for homes or vehicles for disabled veterans.
- VA insurance proceeds, dividends, and interest on insurance left on deposit with the VA.
- State bonuses for service in combat zones.
- Payments from the Compensated Work Therapy program or death gratuities paid to survivors of service members.
Retroactive VA Disability Determination
If you retired from the military based on years of service and later received a retroactive service-connected disability rating from the VA, you can exclude a portion of your retirement pay up to the amount that you would have received in VA disability benefits.
You may also amend your past tax returns (using IRS Form 1040-X) to claim a refund for the taxes paid during the retroactive period.
If you received a lump-sum disability severance payment and are later awarded VA disability benefits, you can exclude 100% of the severance pay from your taxable income.
Special Statute of Limitations
Normally, the statute of limitations for claiming a tax refund is three years from when the return was filed.
However, if you receive a retroactive service-connected disability determination, you have an additional one year to file a claim for a refund, provided the tax years are within five years of the disability determination.
References
For more detailed guidance, you can refer to IRS publications:
Conclusion & Wrap-Up
Navigating taxes as a military retiree doesn’t have to be a headache.
Whether you’re receiving regular retirement pay or military disability benefits, understanding the distinctions can make a huge impact on your tax bill.
Make sure you’re aware of the tax exclusions available to you, especially if you have a service-connected disability.
Always consult the latest IRS publications or a tax professional to ensure you’re taking full advantage of the benefits you’ve earned.
At the end of the day, it’s not just about filing your taxes—it’s about making sure you’re getting the maximum return for your service.
Military Retirement Pay Tax Rate: Frequently Asked Questions (FAQs)
What is the Tax Rate on Military Retirement Pay?
Military retirement pay is taxed as ordinary income at the federal level. The rate depends on your overall taxable income and falls within federal income tax brackets, ranging from 10% to 37%. The Defense Finance and Accounting Service (DFAS) withholds taxes from your retirement pay, and you will receive a 1099-R form annually for tax filing purposes.
Is Military Retirement Pay Taxable at the State Level?
Whether your military retirement pay is taxed at the state level depends on where you live. 38 states fully exempt military retirement pay from taxes while 11 states offer partial tax breaks. California is the only state that fully taxes military retirement pay as well as the District of Columbia (Washington, DC).
Are Contributions to the Survivor Benefit Plan (SBP) Taxable?
No, your contributions to the Survivor Benefit Plan (SBP) are excluded from your taxable income. This reduces the amount of your income that is subject to federal taxes. However, SBP payments made to beneficiaries are generally taxable as income to the recipient.
Is Military Disability Retirement Pay Taxable?
Military disability retirement pay is not taxable if it results from a combat-related injury or if you were entitled to disability payments before September 25, 1975, or were under a binding commitment to join before September 24, 1975. If these conditions are met, your disability retirement pay will be fully excluded from federal taxes.
Are VA Disability Benefits Taxable?
VA disability benefits are not taxable. This includes all forms of VA disability compensation, pension payments, and other related benefits such as grants for wheelchair-accessible homes and vehicles. These benefits are tax-exempt, and you do not need to report them on your federal tax return.
How Does a Retroactive VA Disability Determination Affect My Taxes?
If you receive a retroactive VA disability rating, you can exclude the portion of your retirement pay that corresponds to the VA benefits you would have received. You can also file an amended tax return using IRS Form 1040-X to claim a refund for taxes paid on that portion of your retirement pay during the retroactive period.
Can I Exclude My Disability Severance Pay From Income?
Yes, if you received a lump-sum disability severance payment and are later awarded VA disability benefits, you can exclude 100% of that severance pay from your taxable income. This exclusion only applies to disability-related severance pay, not non-disability severance payments.
Is Military Retirement Pay Subject to Social Security and Medicare Taxes?
No, military retirement pay is not subject to Social Security (FICA) or Medicare taxes because it is not considered earned income. However, if your total income, including military retirement pay, exceeds certain thresholds, your Social Security benefits may be subject to taxation.
Are There Special Tax Considerations for Combat-Related Disabilities?
Yes, if you receive Combat-Related Special Compensation (CRSC) or disability pay due to a combat-related injury, these payments are not taxable. Combat-related injuries include those sustained during armed conflict, hazardous service, or training exercises. These payments are fully exempt from federal taxes.
How Do I Claim a Refund for Retroactive VA Disability Pay?
If you receive a retroactive VA disability determination, you may be eligible to claim a refund for taxes paid on retirement pay that should have been excluded. Normally, you have three years from when you filed the original return to amend it, but an additional year is provided if the retroactive disability determination is received.
Where Can I Find More Information About the Taxation of Military Retirement Pay?
For more comprehensive guidance on the taxation of military retirement pay, refer to IRS Publication 525: Taxable and Nontaxable Income and IRS Publication 3: Armed Forces’ Tax Guide. These publications provide detailed information on which types of military income are taxable and which are exempt.
About the Author
Brian Reese
Brian Reese is a world-renowned VA disability benefits expert and the #1 bestselling author of VA Claim Secrets and You Deserve It. Motivated by his own frustration with the VA claim process, Brian founded VA Claims Insider to help disabled veterans secure their VA disability compensation faster, regardless of their past struggles with the VA. Since 2013, he has positively impacted the lives of over 10 million military, veterans, and their families.
A former active-duty Air Force officer, Brian has extensive experience leading diverse teams in challenging international environments, including a combat tour in Afghanistan in 2011 supporting Operation ENDURING FREEDOM.
Brian is a Distinguished Graduate of Management from the United States Air Force Academy and earned his MBA from Oklahoma State University’s Spears School of Business, where he was a National Honor Scholar, ranking in the top 1% of his class.
