Military retirement pay is a well-earned benefit for those who have dedicated years of service to our country.
Understanding the tax implications of your military retirement pay can be a confusing and frustrating experience.
Many veterans are left wondering, “What are the taxes on military retirement?”
The short answer is it depends on federal tax rules, the state you live in, and whether you receive disability compensation.
In this detailed guide, we’ll reveal and explain everything you need to know about the tax rate on military retirement pay.
We’ll cover federal and state tax implications, special considerations for military disability and VA disability pay, and key strategies to help you keep more of your hard-earned money.
Table of Contents
Summary of Key Points
- Military retirement pay is a taxable benefit for veterans who have served for a number of years, but understanding its tax implications can be confusing and depends on federal and state rules.
- Federal taxes on military retirement pay are based on your overall income, with tax rates ranging from 10% to 37%, while Social Security and Medicare taxes do not apply.
- 38 states fully exempt military retirement pay from state income tax, while 11 others offer partial exemptions based on factors like age and income.
- Military disability retirement pay and VA disability compensation are generally tax-exempt, reducing your taxable income and overall tax liability.
Federal Tax Implications for Military Retirement Pay
At the federal level, military retirement pay is considered taxable income and is subject to federal income tax just like any other source of income.
Here’s a breakdown of what that means:
- Taxable Income: Military retirement pay based on age or length of service is fully taxable by the IRS. The amount of tax you owe depends on your overall taxable income and your federal income tax bracket, which ranges from 10% to 37% as of 2024.
- Social Security and Medicare Taxes: 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 your retirement pay—exceeds certain thresholds, your Social Security benefits may be subject to taxation.
- Withholding and Reporting: The Defense Finance and Accounting Service (DFAS) will automatically withhold federal taxes from your retirement pay. Each year, you’ll receive a 1099-R form, which details the amount of taxable retirement pay and the taxes withheld.
- Exclusions and Deductions: Some veterans may be eligible for deductions or exclusions on their taxable income. For example, if you receive VA disability compensation or Combat-Related Special Compensation (CRSC), that portion is non-taxable and can reduce your overall tax liability.
State Tax Implications for Military Retirement Pay
State tax treatment of military retirement pay varies widely; some states fully tax your retirement pay, some offer partial exemptions, and others do not tax it at all.
Here’s the latest and greatest information:
38 States Fully Exempt Military Retirement Pay
38 states either have no state income tax or fully exempt military retirement pay from taxation.
These states include:
- No State Income Tax At All: Alaska, Florida, Nevada, New Hampshire (only taxes interest and dividends), South Dakota, Tennessee, Texas, Washington, Wyoming.
- Full Exemption States for Military Retirement Pay: Alabama, Arizona, Arkansas, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, West Virginia, Wisconsin.
11 States with Partial Exemptions for Military Retirement Pay
11 states offer partial exemptions based on factors such as age, income level, or the year you retired from the military:
- Colorado: Exempts $15,000 for those under 55, $20,000 for ages 55-64, and $24,000 for those 65 and older.
- Delaware: Excludes $2,000 for taxpayers under 60, and $12,500 for those 60 and older.
- Georgia: Veterans under 62 can exclude $17,500, with an additional $17,500 exemption for earned income over $17,500. Veterans 62-64 can exclude up to $35,000, and those 65 or older can exclude up to $65,000.
- Idaho: Allows exemptions of up to $40,140 for single filers and $60,210 for married couples if you’re 65 or older (or 62 and disabled).
- Kentucky: Exempts up to $31,110 for all military retirees.
- Maryland: Veterans under 55 can subtract $5,000 of military retirement income, while those 55 and older can subtract up to $20,000.
- New Mexico: Veterans can exempt up to $30,000 of military retirement income starting in 2024.
- Oregon: Only retirement pay earned before October 1, 1991, is tax-exempt.
- Utah: Offers a tax credit of 4.85% on military retirement pay.
- Vermont: Provides a $10,000 exemption if your income is below $50,000 for single filers or $65,000 for joint filers.
- Virginia: Veterans can exempt up to $20,000 in 2024, increasing to $30,000 in 2025.
States That Fully Tax Military Retirement Pay
California and the District of Columbia (Washington, D.C.) are the only places in the U.S. that fully tax military retirement pay.
If you live in either of these locations, your military retirement pay will be taxed at the standard state income tax rate.
Military Disability Retirement Pay: Special Considerations
Military disability retirement pay is treated differently from regular military retirement pay.
Here’s what you need to know:
- Tax-Exempt Criteria: Military disability retirement pay received as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service should not be included in your taxable income if any of the following conditions apply:
- You were entitled to receive a disability payment before September 25, 1975.
- You were a member of the military or had a binding commitment to become a member by September 24, 1975.
- You receive disability payments for a combat-related injury, including injuries from armed conflict, hazardous service, or training exercises.
- VA Disability Compensation: If you’re receiving VA disability compensation, you can exclude an amount equal to your VA benefits from your taxable income. If you have not applied for VA benefits but would qualify, you can still exclude that amount from your taxable income.
- Retroactive VA Disability Determination: If you retire from the military and later receive a retroactive service-connected disability rating from the VA, your retirement pay is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can also file an amended tax return (Form 1040-X) to claim a refund on any taxes paid during the retroactive period.
- Special Statute of Limitations: Normally, the statute of limitations for claiming a tax refund is three years from the date you filed the return. However, if you receive a retroactive VA disability determination, the statute is extended by one additional year, provided the tax years are within five years of the disability determination.
Strategies to Optimize Your Tax Situation
Understanding both federal and state tax implications can help you plan effectively and potentially reduce your overall tax burden.
Here are some strategies to consider:
- Choose Your State of Residence Wisely: If you have the flexibility to move, consider living in a state that offers full exemptions on military retirement pay. This decision can significantly impact your financial situation over time.
- Understand Disability Pay Tax Implications: It’s important to know the tax implications if you receive military disability pay and/or VA disability compensation benefits. Military disability retirement pay is not taxable if it results from a service-connected injury or illness. Similarly, VA disability pay is tax-exempt at the federal and state levels, and you can exclude an amount equal to your VA benefits from your taxable income.
- Maximize Deductions and Credits: Take advantage of tax deductions and credits available to military retirees, such as the standard deduction, itemized deductions for medical expenses, or credits for education.
- Utilize Tax-Advantaged Accounts: Contributing to tax-advantaged accounts like a Traditional IRA or Roth IRA can help reduce your taxable income. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are tax-free, which can be beneficial in retirement.
- Consult with a Tax Professional: Navigating the tax implications of military retirement pay can be complex, especially if you have additional income sources or unique circumstances. Working with a tax professional who understands military-specific tax laws can help you optimize your financial strategy.
Conclusion & Wrap-Up
Military retirement pay is subject to various federal and state tax regulations, but understanding the rules can help you keep more of your hard-earned benefits.
38 states currently offer full exemptions for military retirement pay, while others provide partial exemptions.
By understanding both federal and state tax laws and employing effective tax strategies, you can ensure that you’re making the most of your military retirement benefits.
Always consult with a tax professional familiar with military retirement benefits to get personalized guidance and up-to-date information.
You’ve earned these benefits through your service, so make sure you’re taking full advantage of them!
Taxes On Military Retirement: 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.
