Many states have introduced new legislation to help attract and retain military veterans. In fact, several have joined the growing list of states that fully exempt military retirement pay from state income taxes. Even California, which currently offers no exemption, is hoping to join the list. Here’s a quick overview of where each state currently stands and what bills are pending.
Who Is Eligible for Military Retirement Pay?
You may be eligible for U.S. military retirement benefits if you served on active duty with one of the military branches for 20 years or more. You may also receive retirement pay if you medically retired from service. If you were a reservist, you’re eligible for retirement pay once you reach the age of 60 and have accrued 20 qualifying years of service.
In nearly all cases, your military retirement pay counts as taxable income when filing your federal tax return. When it comes to state income taxes, however, it varies depending on where you live.
The Most Retirement-Friendly States For Military Veterans
Over the past year, several states (Arizona, Indiana, Nebraska, North Carolina, Oklahoma, South Carolina, and Utah) have joined the list of those that do not tax military retirement pay. This brings the tax-free list to a total of 37 states.
- Alaska (no state income tax)
- Arizona (retroactive to 1/1/2021)
- Florida (no state income tax)
- Indiana (as of 2022)
- Nebraska (as of 2022)
- Nevada (no state income tax)
- New Hampshire (no state tax on earned income or pension income)
- New Jersey
- New York
- North Carolina (retroactive to 1/1/2021)
- North Dakota
- Oklahoma (as of 2022)
- South Carolina (as of 2022)
- South Dakota (no state income tax)
- Tennessee (no state income tax)
- Texas (no state income tax)
- Utah (retroactive to 1/1/2021)
- Washington (no state income tax)
- West Virginia
- Wyoming (no state income tax)
Eight of the above states have no state income tax. One state, New Hampshire (NH), does not tax earned income or pension income but does tax dividends and interest. Beginning in 2023, however, the state will start phasing out those taxes, as well.
States That Partially Tax Military Retirement Benefits
In June, Virginia lawmakers approved a new tax exemption for military retirees. Beginning in 2022, taxable military retirement income will be reduced by $10,000. Each subsequent year, the exemption will increase by another $10,000 until it reaches a maximum of $40,000 in 2025. Retirees must be 55 years or older to take advantage of this new tax break. Although it still requires Governor Glenn Youngkin’s signature to make it a law, he’s not expected to oppose it.
The other ten (10) states that offer special provisions for those receiving military retirement pay include:
- Colorado – Retired service members under the age of 55 may exclude $15,000 of their retirement pay from state income taxes. Those 55 to 64 can exclude up to $20,000. Retirees 65 and older can exclude up to $24,000.
- Delaware – In June 2022, the Delaware Senate passed Bill 188, which allows retirees (regardless of their age) to exclude up to $12,500 of their military retirement income from state taxes. If signed by the governor, it will increase the current exclusion by $500 and eliminate the age provision (currently 60+).
- Georgia – In April 2022, Governor Brian Kemp signed a bill into law that now allows Georgia military veterans (under 62 years of age) to exempt income tax on up to $35,000 of military retirement income. Those 62 to 64 may claim a $35,000 exemption for any retirement income. Residents over the age of 65 can claim an exemption of up to $65,000 for any type of retirement income.
- Idaho – Veterans 65 and older (or 62+ and disabled) may qualify for one of two deductions based on their filing status: $56,664 (married filing jointly) or $37,776 deduction (single).
- Kentucky – Military veterans may exclude up to $31,110 from their taxable retirement income. Those who retired prior to 1997 may exclude 100% of their military retirement pay.
- Maryland – Retired service members may exclude up to $5,000 from their taxable income. Those 55 or older may exclude up to $15,000.
- New Mexico – In March 2022, Governor Michelle Lujan Grisham signed House Bill 163, which provides a three-year income tax exemption for retired service members. For 2022, the exemption is $10,000. That rises to $30,000 by 2024.
- Oregon – Only retirement pay earned for service prior to October 1, 1991, is exempt from state income taxes. All other military retirement pay is taxed normally.
- Rhode Island – Up to $15,000 of income from military retirement pay may be exempted from personal income tax. If both spouses are eligible and file jointly, the total amount allowed is $30,000. To receive the tax break, residents must have reached full retirement age and have adjusted gross income (AGI) below a certain threshold (adjusted annually).
- Vermont – On May 27, 2022, Governor Phil Scott signed H.510, which includes a $10,000 exemption for military retirement income. Single filers must have an AGI below $50,000 and joint filers must have an AGI below $65,000 to qualify.
States That Fully Tax Retirement Pay for Veterans
There are two (2) states, as well as Washington, D.C., that do not offer any exemptions for military retirement pay.
- California – In January 2022, Assemblymember James C. Ramos introduced bill AB-1623. If approved, military retirement pay would be exempt from state income taxes for residents who are over the age of 60. At this time, however, there is no exemption for retirement pay.
- Montana – In January 2021, Montana Rep. John Fuller introduced H.B 111, which would have given veterans a 50% exemption on retirement pay. Unfortunately, months later the bill died in Standing Committee Taxation. Currently, there is no exemption for military retirement pay.
It’s important to note that tax laws are constantly changing. To ensure you have the most up-to-date information, always consult with a tax professional who is familiar with the tax code in your state.