How Military Retired Pay Is Taxed by State

Why Your State of Residence Changes Everything

Military retirement taxation has gotten genuinely complicated with all the conflicting information flying around — and most retirees figure out the real picture about three tax seasons too late.

Here’s what nobody leads with: the federal government taxes your military retirement pay like ordinary wages. No carve-outs, no special treatment, nothing. But your state? That’s where you either keep thousands or quietly lose them every single year.

Think about a retiree pulling $60,000 annually from DFAS. In Florida or Texas, that person owes zero state income tax. Move that same retiree to New Jersey or New York, and suddenly they’re writing a $3,500 to $4,000 check to the state — every year. Multiply that across a 30-year retirement. The number gets uncomfortable fast.

This hits hardest when you’re deciding where to settle after service. Or when you’ve already moved and realize you never actually ran the numbers. So, without further ado, let’s dive in.

States That Fully Exempt Military Retirement Pay

Seventeen states and one federal entity currently exempt military retirement pay from state income tax entirely. Some got there through blanket no-income-tax structures. Others passed explicit military exemptions — a deliberate choice to attract and keep the retiree population.

Zero State Income Tax (Automatic Full Exemption)

• Florida — no state income tax, period
• Texas — no state income tax
• Nevada — no state income tax
• South Dakota — no state income tax
• Wyoming — no state income tax
• Washington — no state income tax on income; capital gains tax does apply to certain investments
• Tennessee — no state income tax
• New Hampshire — no state income tax on wages or retirement income

Military Retirement Explicitly Exempted

• Alabama — full exemption on military retirement pay
• Alaska — no state income tax, but military pay is protected regardless
• Illinois — full exemption on military retirement income
• Kansas — full exemption
• Louisiana — full exemption
• Mississippi — full exemption
• Missouri — full exemption
• North Carolina — full exemption, phased in starting 2022 and completing by 2027
• Oklahoma — full exemption
• South Carolina — full exemption
• Washington D.C. — exemption available for qualifying veterans

Full exemption means exactly that. You file in that state, your military retirement income never shows up as taxable income, and you keep every dollar DFAS deposits. That’s what makes these states so endearing to us military retirees doing long-term financial planning.

I’m apparently someone who had to learn this the expensive way — I relocated from a high-tax state to Florida without fully grasping what “no income tax” actually meant in practice. I spent two months bracing for a bill that never came. That first year, the difference was roughly $4,200 in my pocket instead of the state’s. Don’t make my mistake. Run the numbers before you sign anything.

States With Partial Exemptions or Age-Based Rules

Several states land somewhere in the middle — they exempt military retirement income up to a dollar cap, only after a certain age, or phase in the benefit gradually over several years.

Capped or Conditional Exemptions

• Arizona — exempts up to $2,500 of military retirement income
• California — exempts 50% of military retirement pay for those 59.5 and older; current rules are complex, verify before filing
• Connecticut — excludes military retirement under certain conditions; federal pension rules apply here
• Delaware — no tax on military retirement income, effective 2022 forward for military retirees
• Georgia — exempts up to $35,000 of retirement income if you’re 55 or older, military pensions included
• Indiana — exempts military retirement pensions from state income tax
• Iowa — exempts military retirement from state income tax
• Kentucky — exempts military retirement pensions
• Maine — no tax on military retirement income
• Maryland — exempts up to $15,000 of military retirement income
• Massachusetts — exempts military retirement pay, though thresholds get complicated when other income is involved
• Michigan — exempts military retirement pensions
• Minnesota — exempts military retirement for qualifying veterans
• Montana — exempts military retirement from state income tax
• Nebraska — exempts military retirement pensions
• New Mexico — exempts military retirement pensions
• North Dakota — exempts military retirement income
• Ohio — exempts military retirement pensions
• Pennsylvania — exempts military retirement pensions
• Rhode Island — military retirement is exempt
• Vermont — exempts military retirement income for qualifying veterans
• Virginia — exempts up to $12,000 of military retirement income
• West Virginia — exempts military retirement income
• Wisconsin — exempts military retirement pensions

The phrase “verify the exact numbers” gets thrown around a lot — but here it genuinely matters. Georgia’s $35,000 cap sounds generous until you’re drawing $50,000 annually. That extra $15,000 is fully taxable. Maryland’s $15,000 exemption? Gone fast for anyone with a mid-career retirement income.

Age requirements catch people off guard too. Georgia’s exemption requires you to be 55 or older when you claim it. Retire at 40, move to Georgia at 41 — that exemption does nothing for you for over a decade. That’s a real cost most people don’t model out ahead of time.

States That Tax Military Retirement Pay as Regular Income

Some states make no distinction. Military retirement pay goes in as ordinary income, gets taxed at ordinary rates, end of story.

• Colorado — state income tax applies; 4.40% flat rate as of 2024
• Connecticut — state income tax applies; 3% to 6.99% depending on bracket
• Hawaii — state income tax applies; 1.4% to 11% depending on bracket
• New Jersey — state income tax applies; 1.4% to 10.75%
• New York — state income tax applies; 4% to 10.9%
• Oregon — state income tax applies; 4.75% to 9.9%
• Vermont — state income tax applies; 3.55% to 8.75%

Colorado’s flat 4.40% is manageable, honestly. Hawaii’s top bracket at 11% and New Jersey’s layered structure are a different conversation — especially for anyone drawing mid-to-high retirement income. On $60,000 of military retirement pay in New Jersey, you’re looking at a $3,500-plus state tax bill annually. That’s not a rounding error. That’s a real number.

These states aren’t unlivable. Cost of living, proximity to family, healthcare access — all of that matters. But walk in knowing what the tax picture looks like before you commit.

How to Factor State Taxes Into Your Retirement Move

Probably should have opened with this section, honestly: state income tax is only one piece of the full financial picture.

A state with zero income tax can still cost you significantly through property taxes and sales taxes. Florida has no income tax — property taxes run roughly 0.70% to 0.98% of home value statewide. Texas has no income tax either, but property taxes average around 1.6% — among the highest in the country. Nevada skips income tax but carries higher costs across the board. None of this makes those states bad choices. It just means the math is more complicated than one headline number.

Three figures actually tell the story: your annual military retirement pay amount, the effective state income tax rate on that specific income (or zero if exempt), and a realistic estimate of property and sales tax in your target location. Run all three before you decide anything.

One thing worth keeping completely separate: VA disability compensation. The VA generally exempts disability payments from both federal and state taxation — that’s a different pot of money with entirely different tax treatment. Don’t mix it into this calculation. They don’t belong together.

Before you sign a lease or close on a house, pull your actual DFAS payment notice — the one showing your monthly retirement amount — and run it against your target state’s income tax calculator. Or spend 90 minutes with a CPA licensed in that state. Most charge $150 to $250 for a consultation. Getting this wrong for even two years costs far more than that.

Tax laws shift. States adjust exemption caps, change age thresholds, phase rules in and out. What’s accurate today may look different by next filing season. Verify current rules with your target state’s department of revenue directly, or work with a tax professional who handles military retirement cases specifically. It takes less time than you think — and the savings are permanent.