You’re transitioning out of the military and all set to start receiving your military retirement.
Or perhaps you’ve been receiving it for a while and your family is considering a big move.
Either way, it’s important to understand how where you chose to live impacts the tax laws surrounding your military retirement income.
In this article, we explain whether you will need to pay income tax on your military retirement and how it will impact your financial future.
Brief Overview of The Numbers
Since your retirement pay is a form of income, the state you live in may charge you income tax on it.
41 out of 50 states levy income taxes.
However, each state handles military retirement slightly differently and whether some or all of it is exempt from income tax.
This can get confusing if you’re researching and trying to compare each state yourself.
We’re here to break down the 4 categories for you.
Here is the breakdown of how states tax military retirement:
- 9 states that don’t tax military retirement because they do not have an income tax.
- 21 states that don’t tax military retirement, but do have an income tax.
- 13 states that have special provisions for taxing military retirement.
- 7 states that fully tax military retirement.
Why is it Valuable for a Military Retirement?
Have you ever heard the saying, “Don’t count your chickens before they hatch?”
Well, you might accidentally count your “money chickens” before they hatch if you don’t properly research what states don’t tax military retirement.
Not only might you have fewer “money chickens” than you expected, but you might also end up with a fox in your henhouse.
But don’t worry.
We’ll help you avoid a big, nasty tax surprise on your military retirement.
Relocation by Choice
You and your family get to make 100% of the choice of where you want to live.
You’ve been told where to live your entire military career. It’s important to understand your choices in these situations:
- This might be the first move you’ve done after retirement
- You and your family are considering moving again after retirement, perhaps for a new job, school, or to be closer to family.
Are you and your family overwhelmed by the number of choices?
We’ll help you consider one of the big financial implications involved in your upcoming move.
You may be tempted to move to the state with the most sunshine and beaches. We understand the draw, but we’re here to let you know that your dream state might not be as tax-friendly as its neighbors.
You may want to consider choosing a state that won’t tax or won’t fully tax your retirement income.
Financial Planning in Retirement
Remember how your COLA (Cost-of-Living Allowance) changed almost every time you PCS’d?
Your choice of living location will have huge implications in your retirement. The (sometimes huge) differences in the cost of living will be important to consider.
Other factors may include:
- Proximity to friends and family
- Civilian job opportunities
- Income taxes
If you move to a state that doesn’t tax military retirement, what would you be able to do with that extra money?
Could you go on an extra vacation every year?
American Dream University can help you find the best opportunities you need to make these big decisions.
When you retired from the military, you completed a W-4P to tell the Defense Finance and Accounting Service how much to withhold from your monthly retirement pay.
These withholdings are for both federal and state income tax.
But what if you move?
Even if you get a new job after leaving the military you will still be responsible to have the correct withholdings held back from your income.
You don’t want to get a nasty surprise and find out you owe the government more money than expected at tax time after not having enough held back from your pay.
How can you avoid this?
- Log in to myPay.dfas.mil and change the adjustments, or
- Call the DFAS Retiree Pay customer service line at 888-332-7411 — option 4, then option 2.
How do you determine what the withholding should be?
We’ll give you a run-through on how different states tax military retirement.
And remember that there are states that don’t tax military retirement at all.
9 States That Don’t Tax Military Retirement Because They Do Not Have an Income Tax
Some states are more friendly for retirees receiving retirement payments (veterans and civilians alike) because none of their residents pay an income tax.
What a beautiful thing.
Here are the 9 states that don’t have an income tax, and therefore they don’t tax military retirement:
- New Hampshire
- South Dakota
21 States That Don’t Tax Military Retirement (Fully Exempt)
While these 21 states do have a regular income tax, they have made military retirement exempt.
Here are the states that don’t tax military retirement:
- New Jersey
- New York
- North Dakota
- West Virginia
13 States That Have Special Provisions for Taxing Military Retirement
Here is our most complex group — the states that may or may not tax your military retirement based on a wide range of circumstances.
- The first $3,500 is tax-exempt.
- Age 55-64 up to $20,000 of military retirement pay is exempt.
- Age 65+ up to $24,000 of military retirement pay is exempt.
- Under age 60 up to $2,000 of military retirement pay is exempt.
- Age 60+ up to $12,500 of military retirement pay is exempt.
- Georgia treats retirement incomes the same. For ages 62 to 64, exemptions up to $35,000, and for ages 65+, exemptions up to $65,000.
- Anyone permanently disabled is also eligible for exemptions up to $35,000.
- Military retirement exempt for age 65+ up to a certain amount. The amount varies year to year.
- Increasing amounts of exemption. Military retirement will be 100% exempt starting in the tax year 2021.
- Retirement for those who retired before 1997 is fully exempt.
- Anyone with retirement beginning after 1997 AND receiving over $41,110 will be fully taxed.
- First $5,000 exempt from state income tax.
- If a retiree is age 65+, permanently disabled, or has a spouse that is permanently disabled, they will receive additional tax breaks which vary year to year.
- Within two years of leaving the military, you must decide between two options.
- 40% exemption for the first seven years, or
- 15% exemption every year past age 67
- North Carolina
- If you served five years or longer as of August 12, 1989, then fully exempt.
- Otherwise, exempt up to $4,000 for single returns or $8,000 for joint returns.
- First $10,000 or 75% of retirement pay is exempt, whichever is greater.
- Retirement earned before 1991 is eligible as a deduction.
- If you retired after 1991, then retirement is taxed normally as income.
- South Carolina
- Under age 65, $3,000 is exempt.
- Age 65+ can exempt $10,000.
If you have any questions about the exact details we suggest visiting each state’s Department of Revenue website for more information.
7 States That Fully Tax Military Retirement
This leaves us with our final category …
… the 7 states that fully tax military retirement.
These states are considered among the least-friendly to retired veterans because of their state income taxes:
- New Mexico
- Rhode Island
Vermont also has some of the highest income tax rates overall, just so you know.
Not to pick on Vermont.
Transition From Military to Civilian Life Can Create Uncertainty. American Dream U Can Help.
The transition from military to civilian life will be big for you and your family.
Deciding which state to live in will be just one of many decisions you’ll be making.
Whether you’re starting the transition now or trying to figure out where to go from here, American Dream University can help.
American Dream University is a non-profit organization dedicated to helping our military members and their spouses transition after their service.
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