En español | 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. Some states exempt military retirement pay from state income taxes, but others tax it as regular income, which can make a big difference in your cash flow for retirement.
Adjacent states can have very different tax situations. Georgia, for example, has 13 military bases but no specific tax exemption for military retirement pay. But Alabama, which is just across the Chattahoochee River and a few miles from Fort Benning, 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's income taxes.
Several states have recently changed their tax rules for military retirement pay. North Dakota introduced a full exemption in 2019, Indiana is phasing in an exemption over four years, and Nebraska is expanding and simplifying its break starting in 2022.
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, his military retirement pay is taxable, but his property taxes are much lower than they were in Illinois. “The total tax burden would have been more in Illinois, even though they did not tax my retiree pay,” 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."
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Twenty-one states exempt military retirement pay from state income taxes, and nine have no state income tax. Sixteen states have a partial exemption for military pay or retirement income (some of those exemptions are available only to retirees age 65 and older or below certain income levels or based on the years when they served in the military). And four states plus the District of Columbia tax military retirement pay as income.
Here's how each state taxes military retirement pay, based on information from Wolters Kluwer Tax & Accounting and state departments of revenue.