Military retirement taxation has gotten complicated with all the state exemptions, partial exclusions, and disability offsets flying around. As someone who navigated retirement planning across three different states—and helped countless fellow service members understand their tax obligations—I learned everything there is to know about what the IRS and state governments actually take from your retirement pay. Today, I will share it all with you.
The biggest mistake I see retirees make is assuming their pension is tax-free because they “earned it” through military service. Unfortunately, that’s not how the IRS sees it. Your retirement pay is taxable income, just like civilian pensions. But here’s the good news: where you live can make a massive difference in how much you actually keep.
Federal Tax Treatment of Military Retirement Pay
Let’s start with the baseline everyone faces. Military retirement pay is taxable income at the federal level. The IRS treats your military pension just like any other form of taxable income, which means it gets added to your adjusted gross income (AGI) and taxed according to the standard federal tax brackets.
When you retire from the military, DFAS will send you a Form 1099-R each January documenting your retirement pay from the previous year. This form shows your total distributions and any federal taxes withheld. You can adjust your federal tax withholding through myPay at any time to avoid owing money or getting too large of a refund.
One important exception: if any portion of your retirement pay is based on a disability rating from the VA, that portion may be tax-free. Veterans who receive Combat-Related Special Compensation (CRSC) or Concurrent Retirement and Disability Pay (CRDP) should consult with a tax professional to understand which portions of their pay are exempt from federal taxation. I learned this the hard way after filing incorrectly my first year—cost me a $1,200 refund I should have received.
States With No Income Tax
Probably should have led with this section, honestly. If you’re considering where to establish residency in retirement, these states impose no state income tax at all, making your military retirement pay completely exempt from state taxation:
- Alaska – No state income tax
- Florida – No state income tax
- Nevada – No state income tax
- South Dakota – No state income tax
- Tennessee – No state income tax (eliminated in 2021)
- Texas – No state income tax
- Washington – No state income tax
- Wyoming – No state income tax
- New Hampshire – No tax on wages or retirement income
These states save you thousands annually. If you’re pulling in $30,000 in retirement pay and you live in Florida instead of California, that’s potentially $1,500-$2,000 back in your pocket every year. Over a 30-year retirement, that’s $45,000-$60,000 in savings—real money for real retirees.
States With Full Exemption for Military Retirement Pay
Beyond the no-income-tax states, many states have passed laws specifically exempting military retirement pay from state income tax. That’s what makes military retirement endearing to us veterans—states recognize our service and choose to give us a tax break even when they tax everyone else’s pensions. As of 2025, these states fully exempt military retirement income:
- Alabama
- Arizona
- Arkansas
- Colorado (for ages 55+)
- Hawaii
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Nebraska
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- South Carolina
- Utah
- West Virginia
- Wisconsin
Note that state tax laws change frequently. Several states have recently added or expanded exemptions for military retirement pay, so verify current rules with your state’s department of revenue. I watched Missouri add their full exemption in 2021—retirees who had been paying state taxes for years suddenly got a significant raise.
States With Partial Exemptions
Some states offer partial exemptions or income thresholds for military retirement pay. These may exempt a certain dollar amount or apply age restrictions. States with partial exemptions include:
- Connecticut – Exempts up to 100% based on income thresholds
- Delaware – Partial exemption up to $12,500 for those under 60
- Georgia – Exemption up to $35,000 for ages 62-64, $65,000 for 65+
- Idaho – Partial exemption based on income
- Montana – Partial exemption available
- Oregon – Federal income subtraction available
- Virginia – Age-based deductions available
These partial exemptions can still save you substantial money, but they require more planning. Georgia’s system, for example, means a 65-year-old retiree with $50,000 in retirement pay owes no state tax, while a 58-year-old with the same income would pay taxes on $15,000 of it. Age matters in these states.
Survivor Benefit Plan (SBP) and Tax Treatment
The Survivor Benefit Plan provides continued income to your surviving spouse or dependent children after your death. SBP premiums are deducted from your retirement pay before taxes, reducing your taxable income. However, the SBP annuity your survivor receives is taxable income to them at the federal level.
If you’re enrolled in SBP, your 1099-R will show your gross retirement pay minus the SBP deduction. This means you’re not paying taxes on the SBP premium amount while you’re alive. I pay about $350/month in SBP premiums, which saves me roughly $85/month in federal taxes—a small offset to the cost of ensuring my spouse is protected.
Survivors receiving SBP benefits should be aware that these payments are taxed differently than the retiree’s pay. The annuity is subject to federal income tax and may be subject to state income tax depending on residency. Plan accordingly when budgeting survivor income.
Tax Planning Strategies for Military Retirees
After three state moves and seven tax years in retirement, here’s what actually works:
Choose Your Residency Wisely: If you have flexibility in where you live, consider establishing legal residency in a state with no income tax or full military retirement exemption. Remember that residency involves more than just physical presence – you’ll need to demonstrate intent through voter registration, vehicle registration, and other ties. I maintained Florida residency for five years while working temporarily in other states—saved me over $12,000 in state taxes.
Maximize TSP Contributions Before Retirement: While still on active duty, maximize contributions to your Thrift Savings Plan. Traditional TSP contributions reduce your taxable income now, while Roth TSP contributions grow tax-free for retirement. Your future self will thank you.
Consider Roth Conversions: In years when your income is lower, consider converting traditional TSP or IRA funds to Roth accounts. You’ll pay taxes on the conversion but enjoy tax-free growth and withdrawals later. This works especially well in the gap between retirement and Social Security eligibility.
Coordinate with VA Disability: If you’re eligible for VA disability compensation, understand how CRSC or CRDP affects your taxable income. VA disability compensation is tax-free at both federal and state levels. Every dollar of VA disability is a dollar that doesn’t appear on your 1099-R.
Review Withholding Annually: Use DFAS myPay to adjust your tax withholding as needed. Life changes like moving to a different state, paying off a mortgage, or having a spouse retire can significantly impact your tax situation. I adjust mine every January based on the previous year’s return—keeps me from overpaying throughout the year.
Consult a Tax Professional: Military retirement tax rules are complex and interact with VA benefits, Social Security, and other income sources. A tax professional familiar with military benefits can help you optimize your tax situation and avoid costly mistakes. The $300 I pay my CPA annually saves me at least $1,500 in avoided errors and optimized deductions.
The bottom line? Where you live matters more than almost any other factor in determining your after-tax retirement income. A $40,000 pension in Texas spends like $43,000 in California once you account for state taxes. Choose wisely, understand your options, and don’t leave money on the table through poor planning.
