Taxing military retirement pay is a decision left up to the states. Find out which states don't tax military retirement and what else you should consider before moving to a state that doesn't tax your retirement pay.
If you're approaching retirement from the military, you'll want to start planning your finances. After transitioning to civilian life, you may receive military retirement pay in exchange for your years of service.
Many states recognize this service and choose to provide different tax treatment for your military retirement pay. In fact, several states don't tax military retirement at all.
Learn about the states that don't tax military retirement and those that do, as well as what to consider before choosing to relocate to take advantage of these tax breaks.
What is military retirement pay?
If you've served on active duty in the U.S. Army, Navy, Air Force, Marine Corps, or Coast Guard for 20 years or longer or have retired earlier for medical reasons, you may qualify for U.S. Military retirement pay. Likewise, you can qualify for retirement pay as a reservist if you accrue 20 qualifying years of service and reach age 60.
Depending on when you joined the military, you can enroll in different retirement systems. You have two main options:
- The Legacy High-3 (High-36) System, which pays 2.5% per year served times the average of your highest 36 months of basic pay.
- The Blended Retirement System (BRS), which provides access to matching contributions in the Thrift Savings Plan, mid-career retention bonuses, and a monthly annuity based on 2% of your pay per year served.
If you joined on or before September 8, 1980, you may also use the 2.5% multiplier per year served based on your active duty base pay at the time of retirement. The system and the High-36 System cap out at a 75% maximum.
Is military retirement pay taxable?
When it comes to military retirement pay, in almost all cases, your pension benefits count as taxable income at the federal level. Disability compensation received from the Veterans Administration Disability Compensation program is nontaxable income and is separate from military retirement compensation.
Many states choose not to tax military retirement pay on state income taxes, whether it's to acknowledge your service to your country or to make that state a more attractive place for veterans to live. Some tax this income fully, and some impose a partial tax.
States that don't tax military retirement pay
States that don't tax military retirement pay include:
- New Jersey
- New York
- North Dakota
- West Virginia
Seven states have no state income tax whatsoever:
- South Dakota
Two more states, New Hampshire and Tennessee, only charge state income taxes on dividends and interest income, though the latter will phase this out in 2021.
States that tax military retirement pay fully, partially, or in a different way
Many states award partial taxation rules or no special tax benefits to military retirees' pay. These states don't have higher tax rates for these retirement benefits, but rather, include them partially or entirely in your taxable income like all other income sources.
The following states tax military retirement income partially, through income exemptions and exclusions:
- New Mexico
- North Carolina
- Rhode Island
- South Carolina
The District of Columbia also falls into this category. These states usually limit these partial exemptions to retirees 55 or older, though many start at the traditional retirement age of 65. Be sure to look into each state individually to understand its specific tax rules related to military retirement benefits and any other types of retirement income you may expect to receive.
The following states tax military retirement pay fully and offer little to no tax benefits for retirement income:
Before you decide to move
Despite many states' efforts to exempt military retirement pay from state income taxes, retirees should consider a state's total tax burden before choosing to move there. While a state might not tax your military retirement pay, you might receive other income that does get taxed or own a home in a place with high property taxes.
Before you make a decision to relocate to any of the states that don't tax military retirement, make sure you take into account the overall tax implications you'll face.
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