Tax Breaks for Veterans: Retirement Pay, Disability, and State Tax Exemptions to Know
Retired military service members may be eligible for tax benefits offered by the federal government and some states.
Some Veterans are unsure about how their military service affects their taxes. Some Veterans are unsure about how their military service affects their taxes. The fact is that standard military retirement pay and Concurrent Retirement and Disability Pay are taxable at the federal level. But VA disability compensation, disability retirement pay, and Combat-Related Special Compensation are generally tax-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 fully taxes 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, some tax breaks and benefits are available to military Veterans that can lower your taxable income. Here are a few examples.
State and federal tax benefits for Veterans
Note: Eligibility rules and requirements vary, so not all tax benefits are available to all retired military members.
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- 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 tax exemptions for Veterans and disabled retirees
If you're a retired military service member, it's worth checking to see if you qualify for state property tax exemptions.
Over 30 states now offer a 100% property tax exemption on primary homesteads for Veterans who are rated 100% Permanently and Totally (P&T) disabled by the VA (or receiving Individual Unemployability).
Many states also extend partial property tax relief and vehicle registration fee waivers to veterans with lower disability ratings or those aged 65 and older.
Older adults, age 65 and older, may also be eligible for property tax relief.
It's good to check the eligibility guidelines in your state, which could help reduce your property tax bill.
Do military members qualify for the earned income tax 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 $70,244 during 2026, and it can lower the taxes you owe or result in a tax refund.
Last year, nearly 24 million eligible workers and families received about $69 billion in earned income credits, with the average EITC amount being just over $2,890.
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 pay
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 military retirement income include:
- California (which continues to weigh legislative proposals to phase in full exemptions)
- Delaware, Georgia, Idaho, Kentucky
- Maryland (offering expanded deductions up to $20,000 for older retirees),
- Montana, New Mexico, Oregon, Vermont
- Virginia (which allows a military retirement subtraction up to $40,000 for eligible retirees).
The District of Columbia currently continues to fully tax military pensions
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