Some Veterans are unsure about how their military service affects their taxes. The fact is that military retirement pay is taxable at the federal level, while disability compensation benefits and disability retirement pay are generally exempt. Additionally, most states don't tax military retirement income or they only partially tax it. (More on that later). However, the District of Columbia and California fully tax military pensions.
It should be noted that military retirees may be surprised by the amount of federal income tax they owe when filing their first tax return after leaving the service. According to the IRS, military retirement income combined with income from a civilian job or a spouse's income, can push Veterans into a higher federal income tax bracket.
One way to address this is to evaluate and perhaps adjust your tax withholding for other employment or your military retirement pay. The IRS also has an online Tax Withholding Estimator tool that can help determine, in advance, how much tax you might owe. However, there are some tax breaks and benefits available for military Veterans, some of which can lower your taxable income. Here are a few examples.
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State and federal tax breaks for Veterans
Note: Eligibility rules and requirements vary, so not all tax benefits are available to all retired military members.
- Tax Benefits for Disabled Veterans. Disabled Veterans may be eligible for tax breaks at the federal and state levels. It's worth noting again that disability benefits you receive from the Department of Veterans Affairs (VA) are excluded from gross income and are not subject to tax. Typically, disability retirement pay, other disability compensation, and benefits received under a dependent care assistance program are also not taxable.
- Veterans Education Benefits. Veterans receiving education, training, or subsistence payments from the VA don’t have to report the payments as income on their federal tax returns.
- Special Tax Refund Considerations. Retired military service members may be eligible for a federal tax refund in special tax situations, such as an increase in disability percentage or being granted combat-related special compensation after concurrent retirement and disability.
Note: Veterans may need to file a tax return to claim disability deductions or exemptions. If your income changes, you should re-evaluate eligibility and file an amended return if necessary. Special tax considerations may also require filing an amended return. Evaluate your disability exemptions and deductions annually and consult a trusted tax advisor as needed.
Property taxes and disabled Veterans
If you're a retired military service member, it's worth checking to see if you qualify for state property tax exemptions. Generally, these exemptions are reserved for disabled Veterans, although eligibility criteria and rules vary from state to state.
Older adults 65 and older may also be eligible for property tax relief. It's a good idea to check the eligibility guidelines in your state, which could help reduce your property tax bill.
Do military members qualify for the earned income credit?
The earned income tax credit (EITC) is often overlooked by eligible Veterans and military households, as well as individuals with disabilities, those living in nontraditional homes, and households with no children.
The credit is designed for people whose earned income was under $63,698 during 2023, and it can lower the amount of taxes that you owe or result in a tax refund. Last year, 31 million eligible workers and families received about $64 billion in earned income credits, with the average EITC amount being just over $2,000.
The IRS reports that almost two million Veterans and military households receive the credit. (Several states also offer an earned income tax credit.)
States that don’t tax military retirement
Most states fully exempt military retirement income from state income tax. As mentioned, however, when it comes to tax treatment, some states don’t favor military income. And other states only offer partial tax breaks to Veterans in terms of how military retirement income is taxed.
States that still partially tax retirement income include Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, New Mexico, Oregon, Vermont, and Virginia. The District of Columbia and California still fully tax military pensions.
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