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All Contents © 2020The Kiplinger Washington Editors
By Sandra Block, Senior Editor
Rocky Mengle, Tax Editor
| November 6, 2019
Courtesy Department of Defense
If you spent your career in the military, you've probably lived all over the U.S. and around the world. But before you put down roots in retirement, find out how much of your hard-earned pension will be taxed. You'll pay tax to the federal government on military retirement pay that's based on age or length of service (disability pensions might not be taxed). With state taxes, though, it isn't always so clear.
Many states provide special tax breaks for military retirees or for retirement income in general. And, of course, some states don't even have an income tax. But some other states aren't so generous when it comes to helping retired veterans at tax time.
We've identified 9 states, and Washington, D.C., with not-too-friendly tax rules for military pensions. These states may tax at least part of your pension, and some tax the entire amount. We've listed the least tax-friendly of these states first. Take a look.
Lowest tax rate: 1% (on up to $8,809 of taxable income for single filers and $17,618 for joint filers)
Highest tax rate: 13.3% (on taxable income over $1 million for single filers and $1,181,485 for joint filers)
Go to California's full state tax profile for retirees
California offers retired military members no way to escape its high tax rates. The Golden State taxes 100% of income from military pensions, along with private, local, state and other federal pensions.
Lowest tax rate: 3.35% (on up to $39,600 of taxable income for single filers and $66,150 for joint filers)
Highest tax rate: 8.75% (on taxable income over $200,200 for single filers and $243,750 for joint filers)
Go to Vermont's full state tax profile for retirees
The Green Mountain State taxes 100% of income from military pensions, along with all other sources of retirement income. The state also has a steep top income tax rate that could nick military retirees who have other sources of income.
Lowest tax rate: 4% (on up to $10,000 of taxable income)
Highest tax rate: 8.95% (on taxable income over $1 million)
Go to the District of Columbia's full tax profile for retirees
Despite the large number of government workers who call it home, Washington, D.C., offers no tax breaks for those who decide to retire there. A $3,000 exclusion for government pensions, including military pensions, was repealed in 2015.
Tax rate: Flat tax of 4.95%
Go to Utah's full state tax profile for retirees
Utah doesn't offer any special tax breaks for military retirees, and its retirement-income tax credit is limited. Residents 65 and older are eligible for a retirement-income tax credit of up to $450 per person ($900 per married couple), but the credit is phased out at 2.5 cents per dollar of modified adjusted gross income that's more than $25,000 for singles or $32,000 for married people filing jointly.
Lowest tax rate: 2.59% (on up to $26,500 of taxable income for single filers and $53,000 for joint filers)
Highest tax rate: 4.5% (on taxable income over $159,000 for single filers and $318,000 for joint filers)
Go to Arizona's full state tax profile for retirees
Arizona does offer a tax exemption for military pensions—but it's a very small one. The exemption is only good for up to $3,500 of military retirement income. (At least it's an increase from 2018, when the exemption was worth just $2,500.) Other states with broad-based retirement income exemptions provide a better tax break for retired veterans. Fortunately, Arizona's income tax rates are relatively low. That's the bright side.
Lowest tax rate: 1% (on up to $3,000 of taxable income)
Highest tax rate: 6.9% (on taxable income over $17,900)
Go to Montana's full state tax profile for retirees
The state provides an inflation-adjusted exemption for public and private pensions, but retirees with a robust military pension probably won't qualify. For 2018, the maximum exemption was $4,180 if federal adjusted income was $36,910 or less ($39,000 for married couples). If your income exceeds these thresholds, you're not eligible for the exemption.
Lowest tax rate: 1.7% (on up to $5,500 of taxable income for single filers and $8,000 for joint filers)
Highest tax rate: 4.9% (on taxable income of over $16,000 for single filers and $24,000 for joint filers)
Go to New Mexico's full state tax profile for retirees
The Land of Enchantment affords no special treatment for military pensions. People who are 65 or older may receive an $8,000 income exemption that includes military pensions, but to qualify, their adjusted gross income must be less than $28,500 for singles or $51,000 for married couples filing jointly. If you're at least 100 years old, all your income is exempt.
Lowest tax rate: 2% (on up to $3,000 of taxable income)
Highest tax rate: 5.75% (on taxable income over $17,000)
Go to Virginia's full state tax profile for retirees
Congressional Medal of Honor recipients don't pay Virginia tax on income from a military retirement plan. However, other retired veterans do pay tax on their military pensions. The state does provides an age-based deduction against all income that is available to anyone who qualifies. Seniors born on or before January 1, 1939, can deduct $12,000. For those born after January 1, 1939, who are at least 65 years old, the deduction is reduced by $1 for every $1 that federal AGI exceeds $50,000 (or $75,000 for married filers).
Lowest tax rate: 2.2% (on $2,000 to $5,000 of taxable income)
Highest tax rate: 6.6% (on taxable income over $60,000)
Go to Delaware's full state tax profile for retirees
There are no special tax breaks in Delaware for military pensions. However, state law allows a modest exemption of up to $12,500 for pension and other retirement income paid to taxpayers age 60 and older (up to $2,000 for taxpayers younger than age 60). Eligible retirement income includes dividends, capital gains, interest, net rental income from real property and qualified retirement plans (e.g., IRAs, 401(k) plans, Keogh plans, and government deferred compensation plans). The general exemption is smaller than similar exemptions available in other states that do not fully exclude military pension income.
Lowest tax rate: 3.75% (on up to $64,050 of taxable income)
Highest tax rate: 5.99% (on taxable income over $145,600)
Go to Rhode Island's full state tax profile for retirees
The Ocean State exempts some retirement income from state taxes, but a military retiree who has income from IRAs or other sources could still get hit with a hefty tax bill. The first $15,000 of retirement income, including private or public pensions, is exempt from state income taxes for retirees who have reached full Social Security retirement age and who have income of up to $81,900 for single filers or up to $102,400 for joint filers (income thresholds are for 2018).