Federal and State Income Tax Chart for Military Retirement Income
This article aims to clarify the federal and state income tax rules surrounding military retirement pay, VA pensions, and disability benefits. We will explore which portions of military retirement income are considered taxable income, how federal tax laws apply, and provide an overview of state income tax policies regarding military retirement.
Federal Income Tax Rules for Military Retirement Benefits
Generally, military retirement pay is considered earned income, meaning there are federal taxes on military retirement pay. For the most part, military retirement income is subject to federal income tax, much like any other earned income. The specific tax rates applied will depend on your overall AGI (adjusted gross income) and filing status for the federal tax return of a given tax year.
VA Pensions and Disability Benefits Tax Deductions
While military retirement pay is generally taxable, VA pensions and disability benefits receive different treatment under federal tax laws, and are typically considered nontaxable income. This encompasses several types of benefits, including:
- Disability payments
- Grants for specially adapted housing
- Amounts received for educational assistance
A pension from the Department of Veterans Affairs is different than what is paid by the US military – including military retirement pay. The blended retirement system (BRS) is composed of retired military pay and the TSP (Thrift Savings Plan). You can expect the government to tax military retirement benefits and withdrawals from a traditional TSP account. Depending on your tax bracket, you might be owed a federal tax refund or will owe a personal income tax bill.
Types of Income at the Federal Level: Exclusions and Federal Tax Breaks for Disabled Veterans
Disabled veterans can reduce their federal income tax burden through specific tax exclusions. Some common examples include:
- A portion of military retirement pay that is based on disability is excluded from taxable income.
- Veterans receiving Combat-Related Special Compensation (CRSC) or Disability Severance Pay are eligible for a tax refund or adjustments.
- TSP contributions made for active-duty service are tax-exempt for combat zones. If you’re a member of the military, you get this tax break; it is not contingent on a disability.
These tax exclusions are designed to provide financial relief to veterans who have incurred disabilities as a result of their military service. A tax professional can offer personalized advice to help you claim all eligible tax exclusions. Also, which brings us to the next section, some states fully exempt military retirement benefits.
State Income Tax if You Receive Military Retirement Pay
While the federal government generally considers military retirement pay as taxable income, the rules vary significantly from state to state. In some states, military retirement pay is excluded from income up to the amount taxable (local tax laws have different ways of determining taxable and nontaxable income for retired military personnel). This variation creates a complex landscape for military retirees, especially those who may move between states after their years of service. Essentially, the tax treatment of military retirement income varies with some states excluding retirement pay from state income, other states making a portion of your retirement pay exempt income from taxation (partial tax), and then some states fully tax military retirement income sources.
Income Taxation Chart: Military Retirement Pay From State to State
The following table provides a general overview of state income tax policies regarding military retirement pay. Please note that state tax laws are subject to change, and it is essential to verify the most up-to-date information with the relevant state’s tax agency or a tax professional. This information is for informational purposes only and should not be considered tax advice.
| Tax Policy | States |
| States That Fully Tax Military Retirement Pay (5) | California, Montana, Rhode Island, Utah, and Vermont. |
| States That Offer Partial Exemptions (11 +1*) | Colorado, Delaware, Georgia, Idaho, Kentucky, Maryland, New Mexico, Oregon, South Carolina, Virginia, and West Virginia (and Washington, DC*) |
| States that Don’t Tax Military Retirement Pay Based on Age or Any Other Factor, but do tax non-military retirement income (25) | Alabama, Arizona, Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, and Wisconsin |
| States That Fully Exempt Military Retirement Pay (9) | Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming |
California is the only state that offers no sort of tax break for military members. Montana, Rhode Island, Utah, and Vermont have special tax rules depending on what was excluded from federal taxation. Tax planning on the state level can be complex before factoring in your federal taxable income, so no matter your personal tax situation, having a tax professional you trust is key.
Tax Considerations for Federal Employees with United States Armed Forces Service
For federal employees covered under the Federal Employees Retirement System (FERS), military service can have significant tax implications. If a FERS employee has prior military service, they can make a military deposit that might increase their pension benefits, but it can also affect their taxable income in retirement. There’s a lot to consider when buying back military time, including survivor benefits.
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