States That Don’t Tax Military Retirement in 2024

Allison Hache
Pekic / Getty Images/iStockphoto
Pekic / Getty Images/iStockphoto

Earning a military retirement is a well-deserved benefit for service members who’ve dedicated themselves to the United States and protecting it from threats. It’s been a valuable incentive for encouraging people to choose and stay in a military career. Typically, you’ll be eligible for military retirement after serving at least 20 years on active duty, but you may qualify sooner if you are injured in the line of duty or must leave the military because of a debilitating health condition.

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Understanding how your military retirement payments are taxed is important for retirement planning because your tax bracket may be greater or less than it is now. This is especially true if you enlist in the military when you turn 18, retire at age 38 and pursue a second career in the private sector. In that case, you may have retirement income from multiple sources, including long-term capital gains from investments.

Who Receives Military Retirement?

In general, you have to complete at least 20 years of active service in the military to qualify for military retirement. This includes officers and enlisted personnel in the U.S. Army, Navy, Air Force, Marine Corps and Space Force. Service members who retire for medical reasons or disability may still be eligible for military retirement without the 20-year requirement. Reservists also can qualify for military retirement after they turn 60 and complete 20 years of service. Civilians working in the military qualify for military retirement if they are veterans, but civilians who have not served can receive retirement benefits from the federal civil service.

How Does Military Retirement Work?

Military personnel can choose between a pension and a Thrift Savings Plan, or TSP, which functions similarly to a 401(k). The pension plan is a defined benefit plan, which means retirees receive a set payment every month for the rest of their lives. Service members enrolled in the TSP contribute 3% of their income to the account during each pay period, and the government matches contributions up to 5%.

The military primarily uses one of three computation methods to calculate retirement payments, depending on the date the individual began their active duty career.

  • Anyone who entered active duty before Sept. 8, 1980, is eligible for the Final Pay plan, which has a rate of 50% of the retiree’s basic pay plus 2.5% for each year of service after 20 years.

  • Those who started a military career between Sept. 8, 1980, and July 31, 1986, fall under the High-36 model, with pay based on the average of the individual’s 36 highest-paying months. Retirees receive 50% of this average, along with another 2.5% for each year they worked after meeting the 20-year minimum.

  • After August 1, 1986, the REDUX plan is an option. Under this plan, pay is based on 40% of the highest-paying 36 months plus 3.5% for each year after 20 years of service. Under this plan, retirees also receive a $30,000 Career Status Bonus.

Do I Have to Pay Federal Taxes on My Military Retirement?

Yes, in most cases, military retirement payments are considered taxable income by federal and state governments. However, disability retirement pay may be exempt if the individual meets certain criteria. For example, someone receiving disability pay after being injured in a war does not have to pay income tax on these payments. No one pays Social Security and Medicare tax out of retirement income.

In What States Is Military Retirement Pay Not Taxed?

Nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. No one living in these states pays state income tax. California and Washington, D.C. levy income tax on everyone, including military retirees. The rest of the states exempt all or part of residents’ military retirement pay from state income tax.

Here are the states that do not tax military retirement pay (but they do have a state income tax for other forms of income):

  • Alabama

  • Arizona

  • Arkansas

  • Connecticut

  • Hawaii

  • Illinois

  • Indiana

  • Iowa

  • Kansas

  • Louisiana

  • Maine

  • Massachusetts

  • Michigan

  • Minnesota

  • Mississippi

  • Missouri

  • Nebraska

  • New Jersey

  • New York

  • North Carolina

  • North Dakota

  • Ohio

  • Oklahoma

  • Pennsylvania

  • Rhode Island

  • South Carolina

  • West Virginia

  • Wisconsin

The following states exempt a portion of military retirement pay: Colorado, Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, New Mexico, Oregon, Utah, Vermont and Virginia. Like tax write-offs, the exemption can help you lower the amount of tax you have to pay.

Final Take

Tax planning is an important part of preparing for retirement, so it’s helpful to know which retirement income sources are subject to federal and state taxes. Understanding how your military retirement benefits are taxed can help you make decisions like when to stop working and where to live if lowering your tax liability is part of your strategy to stretch your savings.

FAQ

  • What is the best state for military retirement?

    • If you're looking for a place where your money stretches farther, consider retiring to one of the states that does not tax military retirement pay. Choosing a place to live is a personal decision, and factors like climate, cost of living and access to healthcare are important. For example, neither Texas nor Florida tax military retirement pay, but the cost of living in Houston is lower than the cost of living in Tampa. As a bonus, Houston Medical Hospital made it to the honorable mention list on U.S. News & World Report's ranking of the best hospitals in the country. Baltimore's Johns Hopkins Hospital also made the list, and the city's cost of living is also lower than Tampa's, which may make it a more attractive option even though Maryland has a state income tax.

  • What is the best state for VA benefits?

    • States offer a number of benefits for veterans, including tax exemptions, fee reductions and education assistance. The best state is the one with the benefits that matter most to you. Texas and Florida offer the most generous tax exemptions and education benefits for veterans and their families. Other states to consider include Alaska, Nevada, Illinois and Virginia.

  • Is my military retirement taxable if disabled?

    • Your military retirement payment may not be taxable in some situations. For example, if you qualified for disability payments before September 25, 1975, or if your disability is the result of an injury sustained in armed conflict, your military disability retirement pay is not part of your taxable income. Other veteran benefits, including education costs, grants for purchasing accommodated homes or vehicles and insurance payments, do not count as taxable income.

  • Do retired people file tax returns?

    • Some retired people file tax returns, typically if they receive income from a part-time job or self-employment and meet the age and income filing requirements. The process for filing a tax return after you've retired is similar to what tax payers who are still in the workforce do. You can file a return online or by mail, and you may even wonder how long it takes to receive a tax refund if you're expecting one.

This article originally appeared on GOBankingRates.com: States That Don’t Tax Military Retirement in 2024

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