When deciding where to spend your golden years, it’s crucial for many of us to consider how the taxes of any prospective location will affect the income we’ll be living on. For retired service members, the state you live in can actually make a significant difference with regard to how much you pay in taxes on your retirement pay. On top of the conventional ways state income tax schedules differ, many states have special policies in place specifically for military retirement pay. For those of you who are interested in expert guidance through every retirement prep decision, a financial advisor could be a great help.
What Is Military Retirement Pay?
Military retirement pay is awarded to members of the U.S. armed forces who have surpassed certain service thresholds. You can earn retirement pay if you serve on active duty for at least 20 years (or if you retire earlier for medical reasons). If instead, you serve as a reservist, you can also qualify once you reach age 60, provided you’ve accrued 20 qualified years of service.
Military retirement pay is considered to be taxable income at the federal level. However, a great many states choose to not levy state income taxes on it, and many others provide exceptions and exemptions to lower your overall tax burden. In fact, only two states remain that fully tax military retirement pay.
States That Do Not Tax Income
Nine states levy no taxes on income, period, so naturally taxes will not be levied on military retirement pay. Eight states — Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington and Wyoming — have no state income taxes whatsoever. The ninth, New Hampshire, only taxes interest and dividend income. If you choose to spend your retirement in any of these states, you’ll only face federal income taxes on what you receive from your military pension.
States That Don’t Tax Military Retirement Pay
The next category of states does have state income taxes, but they’ve implemented specific policies to exempt military retirement pay from those taxes. This is the biggest category of states by a good margin, and it continues to grow. In 2022 alone, Oklahoma, Rhode Island and South Carolina all passed legislation to make military retirement pay tax-free.
You may notice that one of the below states, Kentucky, is also listed in the next section. That’s because, for people who retired from military service before 1997, all of their retirement pay is exempt. For people who retired in or after 1997, only the annual amount that exceeds $41,110 will be subject to taxation.
Here is the latest list of states that do not tax military retirement pay, in addition to the nine that don’t have a state income tax:
These 29 states added to the previous nine that do not have state income tax brings the total to 38 states that do not tax military retirement pay.
States That Partially Tax Military Retirement Pay
The next category of states impose *some* taxes on military retirement pay, but they offer some kind of exemptions such that you aren’t required to pay quite as much. The exact policies are summarized in the below table.
State Military Retirement Pay Policies
|Colorado||Retirees ages 55-64 can deduct $20,000 from their annual income; ages 65+ can deduct $24,000|
|Delaware||Retirees under 60 can deduct $2,000 from their annual income; ages 60+ can deduct $12,500|
|Georgia||All veterans can deduct $17,500. Those who have at least $17,500 in annual income from a different source can deduct another $17,500|
|Idaho||Single filers age 65+ can deduct $31,956. Married joint filers age 65+ can deduct $47,934|
|Kentucky||Those who retired before 1997 pay no taxes. Those who retired after pay taxes on the excess of $41,110|
|Maryland||Retirees under 55 can deduct $5,000 from their annual income; ages 55+ can deduct $15,000|
|Montana||Retirees can exclude up to $4,400 from their annual income, but the amount is reduced by $2 for every dollar your adjusted gross income exceeds $36,700|
|New Mexico||Up to $10,000 of income is exempt from taxes in 2022|
|Oklahoma||Retirees can deduct the greater of $10,000 and 75% of their military retirement pay|
|Oregon||Any pension income earned before October 1, 1991 is deductible|
|Vermont||Up to $10,000 of income is exempt from taxes in 2022|
|Virginia||Retirees ages 55 and up can deduct up to $10,000 in 2022|
States That Fully Tax Military Retirement Pay
That leaves just one state and one district for the final category. California and Washington, D.C. provide no exemptions or special treatment for military retirement pay, taxing it just like any other income. Retirees in the nation’s capital used to be able to deduct up to $3,000, but this option was eliminated in 2015.
The Bottom Line
While it may not be the most important decision you face when planning your retirement, it’s important to be aware of all the factors that will have an impact on your retirement income. The last thing you want is to be surprised that your monthly take-home pay is insufficient to pay for the retirement you’ve worked so hard for.
Tips for Tax Planning
- This is just one of many things you need to be aware of as you plan out your taxes for retirement. You can enlist the help of a financial advisor who specializes in tax planning to help you figure out the best way forward to minimize your tax bill. If you don’t have a financial advisor it doesn’t have to be difficult to find one. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Another way to estimate how much tax you may owe is to use our income tax calculator for the state where you reside.
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