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.
Iowa just became tax free for military retiree pensions. Gov. Branstadt signed it into law on Memorial Day at Camp Dodge with FULL media coverage and was televised live for all to see. He and the Lt Gov even wore their old uniforms from when they were in the military. The Governor has made it policy to make sure vets are welcome in Iowa by signing legislation (on Memorial Day as well) to give vets a boost with various programs such as making sure that vets get hired first in all fields of endeavor, skilled labor, IT, business mgt, technical, engineering etc. as well as full tuition at all state run universities (U of I, ISU and UNI). Good first steps but more can be done I think.
It’s about time Iowa stepped up to the plate and started taking better care of veterans! I was born and raised in Iowa and left when I was 18 to join the Air Force. Now I’m retired from the Air Force with 24 years of service and previously wouldn’t even consider coming back to Iowa because I simply couldn’t afford to live there and pay the hefty taxes. This was a good move and long overdue! Now they need to find a way to reduce the income taxes down from the current 9% you will pay if you make over $63K per year! No wonder the kids grow up and leave the state. And the few who stay are the ones who will pay the big-time taxes (I believe 9% is 9th highest in the country). Iowa must find a ways to break this cycle and it started with this nex tax bill signed last memorial day. Good job Iowa…I’ll stay tuned and watch for more to come!!!! You never know, maybe one day Iowa will become veteran friendly enough I’ll want to return back to my native state!
I am about to retire in Phenix city AL, what would be my tax exemptions in that state?
Phenix City? Man, what a sad place to retire! I grew up there (South Girard, Russell County HS), my dad still lives there, and I pass through occasionally. Seems to get worse every time I come by. Columbus is growing though.
I’m living in Phenix City, AL. Great tax breaks for military retires. Especially if you meet a cetain disability rating. Your kids can go to college free and receive a check while attending. Look into further, I think it’s the best thing going and you’re close to Columbus, Atlanta and various other cities that you can visit over a weekend. Good choice in my opinion. Good luck and good retirement my fellow brother in arms!!
My husband goes into assisted living. So that you can qualify for the benefits I’ll have to transfer some cash to my daughter. Is this legal?.
Hello,
I suggest contacting your state’s assisted living association for information on legalities. To answer your question, it may depend on a few more factors of your situation (possibly how involved your daughter is on the financial side of things). These associations typically have a website with a hotline or phone number to call and ask specific questions. I hope this helps!
Are people reading the article? Seems like most of the questions could be answered if folks just read.
I qualify for the Retired military pay income exemption in NC. I served 21 years from 1966-1987. What is the correct distribution code for box 7. DFAS assigned code 7 for this box, indicating a normal distribution. Unfortunately, this code adds that distribution to my state tax return and balloons the amount due.
Dean,
I think it goes on p.2 under “Other Deductions”. If not, check out Form D-400. It falls under the Bailey Directive. Search PD-99-1 and state statute G.S. 105-134.5 and 134.6.