Military Retirement Taxes: What the IRS Takes (State by State)

Federal Tax Treatment of Military Retirement Pay

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.

States With No Income Tax

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

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. 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.

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

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.

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.

Tax Planning Strategies for Military Retirees

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.

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.

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.

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.

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.

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.

Related Articles

• CRSC Benefits Guide
• Concurrent Receipt 2025
• VA Benefits Overview
• Tricare Options