Is military retirement pay taxed?
Military retirement pay based on age or length of service is taxable and must be included as income for Federal income taxes.
A Payments you receive as a member of a military service generally are taxed as wages except for retirement pay, which is taxed as a pension. If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 5a and 5b of Form 1040 or Form 1040-SR.
| State Code | State Name | One Time Tax Rate |
|---|---|---|
| CA | CALIFORNIA | 6% |
| CO | COLORADO | 4.6% |
| CT | CONNECTICUT | 5% |
| DE | DELAWARE | 5.9% |
For Social Security tax purposes, military retirement pay is not considered earned income and no Social Security payroll taxes (also known as Federal Insurance Contributions Act (FICA) taxes) are withheld from military retirement pay.
Military retirement pay is fully taxable. If you receive a pension based on your age or length of service, it's taxable. You must report the amount you receive as pension income for the year.
Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and Veterans' benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income.
States that Already Did Not Tax Military Retirement
The following states already do not tax military retirement pay at all: Alabama, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, New York, North Dakota, Ohio, Pennsylvania, West Virginia and Wisconsin.
In the past several years, many states have passed legislation affecting taxes on military retired pay both to show appreciation to Veterans and to attract them to settle in their state after leaving the military. In 2021, Arizona, Nebraska, North Carolina, and Utah eliminated state taxes on military retirement pay.
Of all the retirement plans, the Final Pay system uses the simplest formula. You'll receive 2.5% of your final monthly basic pay for every year of service. For example, if you retire after 40 years of active service, then you can expect to receive 100% of your monthly base pay as your retirement pension.
Some Americans might be exempt from filing income taxes because they don't meet the income requirements to file, or they're being claimed as a dependent.
Can a military retiree lose their pension?
If you are convicted of a crime and imprisoned for more than 60 days, your retirement benefits (including your pensions, disability compensation, and education benefits) may be stopped or reduced. The payments will typically be resumed upon your release.
You can get both Social Security benefits and military retirement benefits. Generally, there is no reduction of Social Security benefits because of your military retirement benefits. You'll get your Social Security benefit based on your earnings and the age you choose to start receiving benefits.
Defined Benefit: Monthly retired pay for life after at least 20 years of service (so if you retire at 20 years of service, you will get 40% of your highest 36 months of base pay). Retired pay will be calculated as follows: (Years of creditable service x 2.0%) x average of highest 36 months basic pay.
Payments you receive for education, training, or subsistence under any law administered by the VA are tax free. Don't include these payments as income on your federal tax return.
Concurrent Retirement and Disability Pay (CRDP) allows military retirees to receive both military retired pay and Veterans Affairs (VA) compensation. This was prohibited until the CRDP program began on January 1, 2004. CRDP is a "phase in" of benefits that gradually restores a retiree's VA disability offset.
It's an ASSET that you've earned in service to our great nation: an asset that both you and your family has sacrificed for. In fact, it's a tremendous asset with significant value. For the average retiring officer (let's say an O5 with 20 years), the military pension amount is valued at well over a million dollars.
- Florida.
- Alabama.
- Virginia.
- South Dakota.
- North Carolina.
- Hawaii.
- Nebraska.
- Ohio.
Florida moved to the front of the line on a popular annual ranking of the best states for military retirees by the financial advice website WalletHub, while Oregon slid into the last spot.
In terms of job opportunities for veterans, North Dakota led the rankings, followed by the District of Columbia and South Dakota. Nevada had the fewest. Alaska has the most veterans per capita, followed by Maine and Montana. New Jersey came in last.
| Overall Rank | State | Health Care |
|---|---|---|
| 1 | Florida | 19 |
| 2 | South Carolina | 9 |
| 3 | Virginia | 17 |
| 4 | Minnesota | 1 |
How many states tax military pensions?
Nearly all U.S. states offer exemptions for military retirement income or do not tax it at all. As of 2024, California is the last state that fully taxes military retirement income. Nearly all U.S. states offer exemptions for military retirement income or do not tax it at all.
Retirement — You may be moved anywhere within the United States (including Alaska and Hawaii) or to your home of record outside the United States within three years of your retirement date. (This is called a home of selection.)
If you served in the military after 1956, you paid Social Security taxes on those earnings. Since 1988, inactive duty service in the armed forces reserves (such as weekend drills) has also been covered by Social Security.
All states and the District of Columbia impose these taxes except Alaska, Delaware, Montana, New Hampshire and Oregon.
Earned income tax credit: Special rules allow military members who get nontaxable combat pay to choose to include it in their taxable income. One reason they might do this is to increase the amount of their earned income tax credit. People who qualify for this credit could owe less tax or even get a larger refund.
