Members of the military who serve for 20 years or more can receive retirement pay for the rest of their lives. But the way this military pension is taxed can vary a lot from state to state. Most states that levy income taxes exempt military retirement pay from the calculation, but others tax it to varying degrees, which can make a big difference in your cash flow for retirement.
Adjacent states can have very different tax situations. Georgia, for example, has a partial tax exemption for military retirement pay. But Alabama, just across the Chattahoochee River from Fort Moore (formerly Fort Benning), fully exempts military retirement income from state taxes, and Florida has no state income tax.
“The migration of Georgia military retirees has enhanced Alabama,” says Trish Hadden, public affairs officer at the Georgia Military Officers Association of America, which has been lobbying to exclude military retirement pay from Georgia income taxes.
Several states have recently changed their tax rules for military retirement pay. Indiana, Nebraska, Oklahoma and South Carolina stopped taxing military pensions in the 2022 tax year. Virginia introduced a partial exemption that will expand over the next few years, and Delaware, Maryland and New Mexico have expanded existing exemptions.
This follows the trend in many states of using budget surpluses built on federal aid and economic growth during the pandemic to cut taxes. “States had a lot of money, veterans are popular, and because there aren’t that many of them, it’s not an expensive change,” says Richard Auxier, a senior policy associate with the Tax Policy Center.
A state’s total tax burden matters more to retirees
It’s important to know how your state taxes military retirement pay, but that is just one of many factors to consider when deciding where to retire. A state that doesn’t tax military pensions may have high property taxes or sales taxes, which could end up costing you more. Or it could have high tax rates for other income, which could have a big impact on your take-home pay if you work in a civilian job after retiring from the military.
“I joined the Marines when I was 19 years old, and for more than 24 years, I never paid state income tax to Illinois because they have an active-duty and retiree tax exemption for military pay,” says Patrick Beagle, a retired Marines helicopter pilot who is now a certified financial planner and principal of WealthCrest Financial Services in Springfield, Virginia.
Now that he lives in Virginia, Beagle’s military retirement pay is partially taxable — Virginia is phasing in an exemption over the next several years for military retirees who are 55 and older — but his property taxes are much lower than they were in Illinois.
“The exemption on retired pay in Virginia is not as high as Illinois, but the total tax burden would still be more in Illinois,” he says. “While I often discuss ‘tax-free’ states with regard to pensions and Social Security, I also emphasize that the total tax burden is more important.”
Twenty-nine states exempt military retirement pay from state income taxes, and nine have no state income tax. Eleven states have a partial exemption for military pay or retirement income (some of those exemptions have eligibility rules based on age, income level or period of military service). California and the District of Columbia fully tax military retirement pay as income.
Here’s how each state taxes military retirement pay, based on information from Wolters Kluwer Tax & Accounting, the Military Officers Association of America and state departments of revenue.
How States Tax Military Retirement Pay
