Financial planning is crucial if you’re reaching the end of your military service.
Ideally, you’ll qualify for military retirement pay that should see you in relative comfort through the autumn of your life, but even then, there are some things to consider and plan for.
For instance, do you live in a state that will tax military retirement pensions or one that doesn’t?
Taxation can seismically impact your take-home pension, so you need to know if this will affect you before you can form a retirement budget.
That’s why, in this article, we’re going to list the no-tax states so that you can map out your future confidently!
Do You Pay Tax On Military Retirement Pay?
On a federal level, almost all forms of military pension fall under the normal, taxable income umbrella, so yes, military retirement pay is technically taxable, with the exception being disability compensation covered by the VADCP (Veterans Administration Disability Compensation Program).
Having said that, states have the final say on whether they tax military retirement pensions as standard income.
Some will disregard your military retirement pay completely, usually as a mark of respect for your service and perhaps to cultivate a veteran-friendly ethos and encourage ex-military servicemen to relocate there.
By contrast, other states follow the federal protocol and tax military retirement pay in full as though it were any other taxable income, but it’s not always as black and white as this.
Numerous states do tax military pensions but will acknowledge your service by imposing a favorable rate.
Which States Do Not Tax Military Retirement Pensions?
Right, let’s get down to business. The following states won’t take a penny out of your military retirement pay, leaving you with a lot more leeway when penning your retirement plans.
- Alabama
- Arkansas
- Connecticut
- Hawaii
- Illinois
- Iowa
- Kansas
- Louisiana
- Maine
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- New Jersey
- New York
- North Dakota
- Ohio
- Pennsylvania
- West Virginia
- Wisconsin
That’s a pretty darn impressive list of locations if you’re deciding where it would be best to retire once your service comes to an end!
Which States Do Tax Military Pensions?
The following states impose full income tax on military retirement pensions:
- California
- Utah
- Vermont
- Virginia
Which States Partially Tax Military Pensions?
The states listed below offer exemptions in order to ease taxation on military retirement pay:
- Arizona
- Colorado
- Delaware
- Georgia
- Idaho
- Indiana
- Kentucky
- Maryland
- Montana
- Nebraska
- New Mexico
- North Carolina
- Oklahoma
- Oregon
- Rhode Island
- South Carolina
This category also includes the District of Columbia.
Typically, exemptions in these states are reserved for ex-servicemen aged 55 or above, but a good portion of them will hold off on doling out exemptions until you reach the national retirement age of 65.
Furthermore, the particulars of these exemptions can differ significantly from state to state, so before you decide to move, be sure to read up on exactly what benefits you’ll receive in your current state of residence and any prospective state of residence.
Wait… There Are Some States Missing!
The eagle-eyed out there will have noticed that we’ve yet to list all 50 states, but what other approach to the taxation of military pay could there be?
Well, this final list of states that don’t tax income at all, so although they belong to our first list of states that don’t tax military retirement pensions, they really need their own category, as choosing to settle in one of these states will change your retirement budget dramatically.
- Alaska
- Florida
- Nevada
- South Dakota
- Texas
- Tennessee
- Washington
- Wyoming
New Hampshire also falls into this category, but they do enforce income tax regulations on interest and dividends.
In other words, if your pension funds generate interest in a savings account or as a result of shrewd investing, the interest will be subject to income tax rules.
How Much Will I Be Taxed If I Live In A Full Tax State?
You need only look at the federal income tax laws to ascertain how much you stand to be taxed in a full-income tax state.
For the uninitiated, a bracket-based system taxes wealthy individuals slightly more than those with less money to their name.
This is how the brackets look at this moment in time:
- 10% — $0 – $9950
- 12% — $9951 – $40,525
- 22% — $40,526 – $86,375
- 24% — $86,376 – $164,925
- 32% — $164,926 – $209,425
- 35% — $209,426 – $523,600
- 37% — $523,601+
However, your entire income won’t be taxed in accordance with the bracket it reaches. Only the amount that exceeds the bracket will be taxed in the said bracket, and the same is true as you go down the brackets.
For example, if you earn $50,000 a year, the first $9950 will be taxed at 10%, earnings between $9951 and $40,525 will be taxed at 12%, and so on.
On average, retired servicemen (not officers) receive about $35,000 a year from their pension, so if we assume those are your only earrings, you’d be paying…
- 10% tax on the first $9950, which amounts to $995.
- 12% on the remaining $25,050, which amounts to $3006
- So your total tax outgoings would be $4001
- Leaving you with a post-tax income of $30,999 per year
Final Thoughts
As you can see, there are some big gains to be made by relocating to a state that doesn’t tax military retirement pensions, but before you up sticks and leave, be sure to investigate the taxation laws of your desired location fully.
They may well give your pension a pass, but there might be steeper fees on other assets and earnings. Property tax, for example, might be through the roof in some of these states, so a full tax burden analysis is required before you make your decision.
In all likelihood, your military pension is just one of the nest eggs you’ve got to look forward to, but you must factor your entire wealth into the equation when deciding where you’ll spend your golden years.
Weigh it up against the complete tax burden of prospective home states, and you’ll find the perfect place to settle down and enjoy your life.
As a current Mortgage Underwriter with 15 years of experience, I have seen my fair share of money-related issues. Whether that be high levels of debt, not enough credit, or simply a lack of funds - I’ve had clients who fit into these categories.
Here I will share tips, tricks, and experiences on how you can get yourself back in control of your finances.
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