You can’t avoid paying federal tax on your military retirement pay since the IRS taxes that income as a pension. But you might be able to escape a state tax bill — as long as you don’t retire in one of the places on this list. When it comes to taxing Veterans, these are the most expensive places in the United States.
States that tax military retirement pay in 2023
The good news is that most states fully exempt military retirement income from state taxation. The bad news, when it comes to tax treatment, is that some states don’t favor retired military members. Other states only offer partial tax breaks to Veterans.
Here are the states that still tax military retirement income to some degree as of Veteran’s Day 2023.
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California
The Golden State is known for high taxes, and when it comes to military retirement benefits, California is the most expensive state in the country. That’s because it is the only state in the U.S. that fully taxes military retirement pay.
As Kiplinger reported, state lawmakers recently considered a proposal to end the California military pension tax. However, the bill was delayed and won’t be considered again until next year.
How California taxes other types of retirement income:
- California can impose a 2.5% state penalty on early distributions from retirement plans, annuities, and IRAs (in addition to the 10% federal penalty for early withdrawals).
- Most retirement income is subject to state tax, including federal and public pensions.
- Tier 1 railroad benefits and Social Security benefits are tax-exempt.
Colorado
Colorado allows Veterans to exempt part of their military retirement pay from state income tax. How much you can exempt depends on how old you are at the end of the tax year.
For 2023, retired service members under age 55 can subtract $15,000 from their taxable income. Retirees 55 and older can claim the regular Colorado pension and annuity subtraction ($20,000 up to age 64 and $24,000 for taxpayers 65 and older).
How Colorado taxes other types of retirement income:
- Social Security benefits are tax-deductible.
- Railroad retirement benefits are tax-exempt.
Delaware
Delaware taxes military retirement pay and only offers an income exclusion of up to $12,500. However, military disability retirement pay paid to Veterans and their families is not taxed by the state. Income tax rates max out at 6.6% in Delaware, but the city of Wilmington imposes a separate income tax of its own.
How Delaware taxes other types of retirement income:
- The pension exclusion of up to $12,500 (maximum exclusion for all income) also applies to other types of retirement income for taxpayers 60 and older, such as from dividends, rentals, and interest.
- Social Security retirement benefits are tax-exempt.
- Delaware does not tax railroad retirement benefits.
District of Columbia
Although Washington D.C. isn't a state, it is one of the most expensive places in the U.S. for retired Veterans to live. Like California, the District of Columbia fully taxes military retirement pay. And to make matters worse, tax rates can reach as high as 10.75% for some residents.
How Washington D.C. taxes other types of retirement income:
- Tier 1 railroad benefits are tax-exempt.
- Social Security benefits are tax-exempt.
Georgia
Georgia’s exclusion for military retirement pay is much more generous than in Delaware. That’s because taxpayers can exclude $17,500, and their spouses can as well (if they qualify). So, some married veterans can subtract $35,000 from their Georgia taxable income.
Additionally, Georgia allows an additional $17,500 subtraction if you receive more than $17,500 of earned income during the tax year. That’s good news for some Veterans.
How Georgia taxes other types of retirement income:
- Georgia doesn’t tax Social Security retirement benefits.
- Retirement income exclusions are available to taxpayers 62 and older.
- All retirement income that is taxable at the state level will be taxed at 5.49%, beginning in tax year 2024.
Idaho
Not everyone receiving a pension qualifies for Idaho’s pension exclusion, including Veterans receiving military retirement benefits. That’s because you must be 65 or older (or 62 or older if you have a disability) to subtract your retirement pay from your Idaho taxable income. The maximum exclusion amount for 2023 is $41,140 and is recalculated by the state each year.
How Idaho taxes other types of retirement income:
- Social Security benefits aren’t taxed by Idaho.
- Railroad retirement benefits are tax-exempt.
- Taxable income is taxed at a 5.8% rate.
Kentucky
Kentucky allows a retirement income exclusion of up to $31,110. If you’re retired from the military (and your federal pension exceeds that amount), you may qualify to exclude a higher amount. Retirement income attributable to service credits before 1998 is 100% tax-exempt.
Retirees with service credits in 1998 and later can use the worksheet on Kentucky Schedule P to determine how much of their retirement pension is taxable.
How Kentucky taxes other types of retirement income:
- The retirement income exclusion of up to $31,150 also applies to distributions from 401(k)s and IRAs.
- Kentucky doesn’t tax Social Security benefits.
Maryland
Maryland recently increased its income exclusion for retired military members, but the exclusion is still much less generous than in other states that tax this type of income. Retired service members 55 and older can deduct up to $20,000 from their taxable income, but this amount drops to only $12,500 for those under age 55.
How Maryland taxes other types of retirement income:
- A pension exclusion of up to $34,300 is available to retirees 65 and older and those with total disabilities (or who have spouses with total disabilities).
- Social Security and railroad retirement benefits are tax-exempt.
Montana
A new law will allow Veterans to exclude up to half of their military retirement pay from their Montana taxable income. The law goes into effect Jan. 1, so it will apply to tax years 2024 and later.
For income that is taxable at the state level, retirees pay a tax rate between 1% and 6.75% in 2023. For 2024, taxable income will be taxed between 4.7% and 6.5%.
How Montana taxes other types of retirement income:
- Railroad retirement benefits are tax-exempt.
- Montana taxes Social Security benefits unless your income falls below the threshold set for the year.
New Mexico
New Mexico is becoming a less expensive place for retired military members, but it’s still more expensive than most states in the U.S. For 2023, Veterans can exclude $20,000 from their taxable income. This exclusion will increase to $30,000 for tax years 2024 through 2026.
How New Mexico taxes other types of retirement income:
- Taxpayers 100 and older are exempt from paying New Mexico income tax.
- New Mexico technically taxes Social Security benefits, but due to high-income thresholds, most retirees won’t pay state tax on this type of income.
Oregon
Oregon fully exempts military retirement pay for some retirees. However, only Veterans whose service credits were earned before October 1991 are eligible for the 100% exemption. Retirees who served before and after that date are eligible for a partial income exclusion.
How Oregon taxes other types of retirement income:
- Railroad retirement benefits are tax-exempt.
- Social Security benefits are tax-exempt.
Vermont
Some retirees qualify for a military retirement income exclusion in Vermont. However, income limits apply, and the exclusion is worth a not-so-generous $10,000. To make matters worse, Vermonters cannot claim both the military retirement exclusion and Social Security income exclusion. These are only a few of the reasons Vermont is ranked by Kiplinger for 2023 as one of the worst states to retire to when it comes to taxes.
How Vermont taxes other types of retirement income:
- Social Security benefits are taxable for taxpayers who do not meet income requirements.
- Railroad retirement benefits are tax-exempt.
Virginia
Due to a new budget deal, Virginia is raising its military retirement income exclusion over the next few years. In 2023, the exclusion is only $20,000, but this amount will increase to $30,000 in 2024 and to $40,000 for tax years 2025 and later. The exemption for the 2023 tax year is currently only available to taxpayers 55 and older, but the age requirement will be eliminated next year in 2024.
How Virginia taxes other types of retirement income:
- Social Security benefits are tax-exempt.
- Railroad retirement benefits are tax-exempt.
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