Military veterans should consider retiring to one of these states if they want to lighten their tax burden
Many people intend to retire in a state where they can get the most bang for their buck, and military veterans are no exception. For them, this often involves finding a state that doesn’t tax military retirement pay, or else offers a generous exemption.
In the lists below, you’ll find a breakdown of how military retirement pay is treated by the tax codes of the various states. In those states not included, military retirement pay is fully taxable.
States with No Income Tax
At the top of the list are the nine states that have no state income tax at all. By default, military retirement pay is completely exempt from tax. These states are:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Note: New Hampshire and Tennessee both tax interest and dividends. For most taxpayers, however, this would constitute a relatively small portion of total income.
States That Exempt Military Retirement Pay
These states do have an income tax, but they exempt military retirement pay entirely. These states are:
- Alabama
- Connecticut
- Hawaii
- Illinois
- Kansas
- Louisiana
- Massachusetts
- Michigan
- Mississippi
- New Jersey
- New York
- Ohio
- Pennsylvania
- Wisconsin
The Special Cases
Finally there are several states that do not offer a full exemption of military retirement pay but do offer some form of preferential treatment.
- Arizona – Military retirement pay is not exempt, but you can subtract up to $2,500 for military pensions in arriving at Arizona taxable income.
- Arkansas – Retired military personnel are entitled to a $6,000 exemption.
- Colorado – Persons who were 55-64 years of age as of December 31 may exclude up to $20,000 of their military retirement benefits received during the calendar year. Persons who were 65 years of age or older as of December 31, may exclude up to $24,000 of their military retirement benefits received during the calendar year.
- Delaware – Individuals under the age of 60 can exclude up to $2,000 of military retirement pay and individuals 60 and over can exclude up to $12,500.
- Idaho – Retirement benefits to a retired member of the military 65 or older, or disabled and age 62 or older are deductible. The amount deducted must be reduced by retirement benefits paid under the Federal Social Security Act or the Tier 1 Federal Railroad Retirement Act. The maximum amounts that may be deducted are $41,814 for married filing jointly and $27,876 for single. The amount varies from year to year.
- Indiana – You can deduct the actual amount of retirement pay received or $5,000, whichever is less, if you meet certain conditions.
- Iowa – Up to $10,000 (joint returns), and up to $5,000 (other returns) of military retired pay and SBP benefits may be excluded for those who are 55 years old and older, disabled, and for surviving spouses.
- Kentucky – If you retired in 1997 or before, all of your retired military pay is exempt from tax. If you retired after 1997, your pay is subject to state tax if it exceeds $41,110.
- Maryland – Military retirees are exempt from Maryland income tax on the first $5,000 of their retirement income. In addition, military retirees who are over the age of 65, totally disabled, or who have a spouse who is totally disabled, receive an additional subtraction.
- Missouri – For the tax year beginning January 1, 2012, 45% of a military pension income will be exempt from MO state tax. This tax deduction will increase 15% annually until January 1, 2016 when all military pension income will be tax free.
- Montana – The first $3,600.00 of retired military pay is exempt from income tax.
- New Mexico – The maximum exemption is $2,500. To qualify, the amount on line 7 of the state income tax form must be equal to or less than $36,667 (single), $27,500 (married filing separately), or $55,000 (married filing jointly). A deduction also applies for those 65 and older if your adjusted gross income is not over $51,000 for a joint return, $28,500 for a single taxpayer, or $25,500 for a married taxpayer filing separately.
- North Carolina – See the new Bailey decision concerning federal, state and local retirement benefits.
- Oklahoma – Each individual may exclude 75% of their retirement benefits or $10,000 (whichever is greater), but not to exceed the amount included in the federal adjusted gross income.
- Oregon – If you receive military retirement pay, you may qualify for a federal pension subtraction. If you are a special-case Oregon resident, your pension remains taxable as Oregon-source income.
- South Carolina – Any person retired from the uniformed services with at least 20 years of active duty is allowed an exemption from SC income tax of up to $3,000 until age 65. At age 65 $10,000 of retirement pay is exempt.
- Utah – Up to $4,800 of qualified retirement is waived until age 65. At age 65 or older, $7,500 is waived.
- West Virginia – An individual, regardless of age, may deduct up to $2,000 of benefits received from military retirement.
While you’re planning ahead for the future, don’t forget about filing this year’s state and federal taxes. You can do that with RapidTax.
Updated for 2015 tax year.
I currently am a New York resident, active duty and ready to retire. I have a house in N.C. and looking to retire there. Question, will my military retirement pay be exempt still if I live in N.C. and I’m still considered a New York resident? Also what source can I use to look up other benefits to living in NC as a military retiree? Thank you.
Hi Tony,
As long as you are still a New York resident, New York still has the right to tax all of your income according to its laws. Thankfully, NY exempts military retirement pay entirely. The real question here is whether you will still qualify as a NY resident. Chances are if you are permanently living in NC that you will no longer be a NY resident. As for figuring out NC’s taxes, you may just have to spend some time on the Dept. of Revenue website. These two pages should get you started though
http://www.dornc.com/taxes/individual/armedforces/index.html
http://www.dornc.com/taxes/individual/retirement.html
On top of military tax exemption, are there other “state financial benefits” that some states offer over others that are military tax exempt?
Hi Glenn,
Yes, pretty much every state has a unique tax situation that could offer you more benefit depending on your personal tax situation. You’ll have to do some investigating to figure out which state is best for you.
What about GA? I’m in the Army and thinking about retiring in GA.
Hi John,
As far as I’m aware, there’s no special allowance made for military retirement pay. However, Georgia does have a fairly generous retirement income exclusion that applies to everyone (as opposed to members of the military specifically). For the 2012 tax year, the maximum retirement income exclusion is $35,000 for taxpayers who are (A) 62-64 years old, or (B) less than 62 and permanently disabled. The retirement exclusion is $65,000 if the taxpayer is 65 or older.
Hello –
My husband is retired Navy; served 22 years and gets a retirement check. He is also 48 yrs old and works full-time as a civilian. Unfortunately, because he is not 62 or older – his retirement income is fully taxed at our tax rate.
Most of GA’s benefits regarding taxes benefits individuals 62 and older.
Just an FYI
http://www.fallcreekland.com/area/military-retirement/
You forgot NC!
Hi David,
North Carolina is included under Special Cases, but still a good place for vets to retire.
How is NC a good place for Vets? My husband Are contemplating not retiring to NC due to changes in their tax laws. He as served sine Sep, 1985 and falls 1 year shot of the Aug, 1989 cut off. I will continue to work full time while my husband is retired. Can you please show me how this it will benefit us to retire in NC. Other states we are considering include GA or FL.
Hi Cyndi,
North Carolina has special military retirement pay exemptions. NC allows a full tax exemption for retirees with five years of service as of August 12, 1989; otherwise a deduction of up to $4000 ($8000 for joint filers).
Thank you for your response.
But that means that out of $100K we would only be taxed on $92K, correct? My issue is that is a much lower vantage point than the previously tax exempt status offered in NC for military retirees.
I’m really disappointed with the changes. I was trying to appreciate your earlier comments, I’m failing to find the benefit of this new tax system. Are there other tax benefits that might offer pull for retiree in NC?
Thanks in advance.
Cyndi
I’ve been retired from the Navy since 1996. My own Personal Opinion is that any person who has served this country for the Full 20 years (Grandfathered) or if they took an early retirement on a case by case basis (for extenuating circumstances such as the Member retaining Custody of Minor Children because of Divorce. Having No One willing to watch or take care of the Minor Children). Should be Fully Tax Exempt in all 50 states. This should be done for the Main Reason that the State where the Military Retiree retires to should show them Gratitude for their service. Considering that approximately only 7% of this Nation answers the Call to Serve. This should also apply to Married Military Couples as well. Considering about 85% of Military Marriages end in Divorce.
Those Individuals receiving Medical Compensation due to Injury while in the Service should also be Tax Exempt or continue to be Tax Exempt.
I think they got rid of the 4000 dollar exemption under the Bailey bill starting for tax year 2014.
Not any more. All military who are not excluded under the “Bailey” law are now paying taxes on 100% of military retirement pay. They just changed that in ’15. Thanks NC! Just when you thought it couldn’t get any worse……
Hi Mike,
Thanks for bringing this to my attention. I’ve included a link to more information about the Bailey law above, under “The Special Cases”.
Move to FL. Problem sovled. No state income tax on any income no matter where it comes from. You don’t even file state tax forms!
Problem solved? I don’t think so. You may not have state income taxes, but your military retirement pay is taxed at the federal level.
NC knows that it has a lot of military stationed there who then purchase homes and then eventually end up staying beyond retirement. They are not going to miss out on that chunk of money. Sad but it all comes down to money.
What is so special between 1985 thru 1989 regarding retirement? I served through these years and do not see anything so great. If there is something I missed between these years will it effect my being VA rated: TDIU 100% Disabled SC and a military retiree regarding CRDP?
Update! NC no longer allows for the $4,000 exemption. It’s not looking good for us in NC.
Thank you, but this sucks!
Welcome to California
too bad about NC. I missed the deadline by 2 weeks. that makes Tennessee a better choice, and Kentucky a close second.
income——-20000———50000———-100000
fully taxed—–1096———-2875————–5750
4kexepmt——-920———–2645————-5520
all exempt——0—————–0——————–0——
Excluding exemptions (as well as the fact your taxable income on va form 760 carries over from federal AGI which has already deducted IRA contributions, tuition, HSA contributions), I don’t really see any issues with North Carolinas treatment. We all have to pay taxes…..the problem is not that veterans are fully exempt…..its that tax rates are so high because we’ve allowed the government to grow way out of control.
As far as Tennessee being a better choice. If your planning on working your going to find Tennessee has very little opportunity and HIGH sales taxes. At least North Carolina takes good care of its infrastructure with those taxes.
Food for thought. You mix the energy credits of solar panels/installation from the Federal and North Carolina tax codes (No other state outside the good ole south can match NC), and the governments are reducing your tax to pay around half of your panel/installation price. There’s not a much better investment in retirement than cutting your electricity bills to less than half. Note-the NC deduction is broken up over 4-5 tax years
No bias here. Navy veteran. Tennessee home of family. North Carolina home of record. Now living in Virginia.
My husband joined the service in 1982. He is retired and we are looking for our final home. We are thinking about NC as our home. Do the law for tax exempt apply to him even though he joined in Ohio?
Hi,
If I joined the military in January 1984, but it was the delayed entry program, and did not start active duty till 14 August 1984; do I still meet the 12 August rule?
I know that 14 comes after 12 (and 2 days short), but there were dates for MEPS and other required military meetings and even the Army showes my Pay Entry Date as January.
Thank you.
Al, I’m in the same boat as you…. Date of Entry Into Military Service is July 84 but didn’t start Officer Candidate School for two weeks (14 Aug 84) and got commissioned in Nov 84. My only date before the 12 Aug is the Pay Entry Date in July. Looks like no one responded to your question that I can see here. How did it all turn out for you? Did you get any clarification on this issue? This may be a show stopper for NC if I have to pay taxes on my pension.
thanks,
Mike
Pamela,
If he retired from the active military, it will not matter where he joined since it is a federal retirement check. He just needs to meet the 5 years service prior to 1989. I am not sure about retirement from National Guard.
Please correct your statement as M Buchanan comments correctly. Military retirement pay does not come from a state, that is not part of the calculations.
As for calculating time in service, your official date will be on your DD214. Some delayed entry used to count.
It matters what state of residence you have on your tax form for the year you are filing. There is a certain amount of the year you have to live in the state to claim it as your tax filing state. Where you joined the service used to matter so they could pay you to return there upon discharge (or equivalent).
And if you are getting $40K retirement pay, you would have to figure out if paying taxes on that in NC yet going with solar panels outweighs no tax on that in FL.
Sorry, James, we all have to pay taxes but some of us will calculate the least we can pay so we can actually live on our retirement pay. I like NC, but if I were moving, I’d go to TN if I wanted the same weather or FL if I wanted the coast, then visit NC.
I joined in Aug 1980 and had been retired in NC since 2000. Here’s what I had experienced here. When you prepare your income tax return, your military income will be exempted under the the Bailey Settlement if you were vested as of August 12, 1989.
Came back to NC (joined in 1977) got out in 1981 for 3 months then back in till 2002….at least its better in NC than before when there was NO exceptions.. i agree no one should take military retirement up till say 50K …we’ve earned it my last 2 yrs in the railroad (2nd job) i was in nebraska geez talk about a taxing :-)) state.. 300 $ a month for state tax taken out of my military retirement alone and they asked me why i was leaving….
We are considering leaving Nebraska for Nevada for that very reason. Nevada has no state income tax , doesn’t have miserable winters and property taxes are far less than Nebraska, which should just call itself NeTAXA, that’s all they do here is tax,tax, tax and they don’t exclude veterans who honorably served for 20 years! NC was nice, but still more taxing than Nevada will be.
One has to note that up to $20k is non taxable (state filing). This adjustment has been in effect for quite sometime now. Plus the $2000 mentioned. But one must remember West Virginia has no active-duty bases.