State Tax Breaks Available For Military And Retirees
You may know that military allowances like Basic Allowance for Housing are tax-free. You may also know that most VA benefits are also tax-free.
Did you know that many states do not charge income tax on active duty or retired military pay? Many others tax only a portion of these pays.
To see what type of tax breaks your state offers for military members, retirees and survivors check out our list.
List: Military Retirement Income Tax
If you’ve retired from the military, you’ve earned a pension. How large that pension is depends on your pay grade. But to a lesser extent, it also depends on where you live in the country.
Since certain states tax military retirement income at different rates, the amount that ends up in your pocket varies from state to state, just like veterans property tax exemptions.
Take a look at this chart to see if you’re receiving all the tax benefits you should be.
Chris Birk is the author of âThe Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.â
An award-winning former journalist, Chris writes about mortgages and homebuying for a host of sites and publications. His analysis and articles have appeared at The New York Times, the Wall Street Journal, USA Today, ABC News, CBS News, Military.com and more.
More than 300,000 people follow VA Loans Insider, his interactive VA loan community on Facebook.
Other Popular Retirement States
There are as many opinions on retirement as there are places to retire, especially in a country as large and diverse as the United States. For example, Bankrate.com put Georgia as the best state to retire in its 2021 study, followed by Florida, Tennessee, Missouri, and Massachusetts. Why Georgia? Bankrate.com said the states low cost of living and lighter-than-normal tax burdens place it 3rd in affordability. Moreover, Georgia has great weather and a beautiful coast for those who want to live along its smaller waterfront.
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How Do You File State Income Taxes When Youre In The Military
Perhaps youre in a situation where youre still in the military at the moment, but want to relocate to another part of the country that will ultimately be your new home sweet home upon retirement. You may wonder how this affects your tax obligations in terms of where the funds go: your new home or your old.The short answer: It depends. The long answer: You pay to the state of your legal residency, or SLR. Your SLR is your home of record when you first enlisted in the armed forces and something you need when preparing for tax season. If you know for sure that the state youre moving to will ultimately become your place of permanent residence, you can change your SLR.Its important to be mindful of the fact that state tax laws differ and frequently change from one year to the next. So you may want to speak with a tax preparation professional to be sure of whats right for your situation and avoid any filing mistakes.
States With Special Military Retirement Pay Exemptions
The following states have special provisions for military or public pensions:
| Arizona1 |
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Competition Between The States
While veterans are represented in every state, some states attract more than others. Maryland, home to the U.S. Naval Academy and many defense contractors, is one of them.
Under the compromise reached with the legislature, the amount excluded from income tax doubled to $10,000not nearly the exemption Hogan wanted, but one his spokeswoman Shareese DeLeaver-Churchill called a first step in a longer process of eliminating taxes on all retirement income in Maryland.
The state estimated the expanded exemption would cost $2.7 million in fiscal 2016 and about $3 million annually in subsequent years. Local taxes, which are tied to the state tax, would decrease by $2 million annually.
In Connecticut, Democratic Gov. Dannel Malloy and the legislature agreed to increase the exemption for military retirement pensions from 50 to 100 percent. That is estimated to cost the states treasury $10 million over the next two fiscal years. The loss will be more than covered by an increase in business taxes expected to bring in $1 billion.
Rep. Matthew Lesser, chairman of the General Assembly Banking Committee, called the tax cut for military veterans popular. The only opposition came from those who questioned whether the state could afford it. It also put the state in a better position to compete for veterans with its neighborsMassachusetts fully exempts military pensions and New Hampshire has no income tax.
Total Of States Tax Burden
Its vital to know how your state charges military retirement pay, but thats fair one of numerous variables to consider when choosing where to resign. A state that doesnt charge military annuities may have tall property charges or deals charges, which seem conclusion up costing you more. Or it might have tall charge rates for other pay, which may have a enormous affect on your take-home pay in case you work in a civilian work after resigning from the military.
Twenty-one states absolved military retirement pay from state wage charges, and nine have no state salary assess. Sixteen states have a halfway exception for military pay or retirement wage . And four states additionally the Area of Columbia charge military retirement pay as income.
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Your Biggest Lifetime Expense: Taxes On Military Retirement
There is one major problem that everybody ignores, yet I think that this is the greatest cost over any individuals lifetime and the greatest risk to the American people and the American way of life: taxes. I encourage you to understand the true history of the tax code in America, where it comes from, why its there, and how its hurting the American people. Its not about taxing the rich versus taxing the poor thats just political fear-mongering in the media.
The reality is that taxes are taking from one person against their will and giving it to another. Personally, Id rather make that choice myself and call it charity. But by constitutional law, the government can now come at you with guns and take your money from you just because they think somebody else should have it. Its wrong and its immoral. Unfortunately, we have to deal with it for the time being.
What the majority is unaware of, though, is that all the increases in healthcare have caused two problems that will increase taxes on military retirement. The first is that the older, aging population the non-working, non-producing population is living longer. Theyre not dying when the government thought they were going to die when they implemented these plans like Medicare, Medicaid, and Social Security. The reason the corporate pension system doesnt work anymore is that companies couldnt afford it. People werent dying, and they had to keep paying them.
States Compete For Military Retirees
Retired Army Reserve Lt. Col. Philip Kowzan of Spokane, Washington, plays taps at a military honor funeral. States are competing to lower income taxes on military pensions to attract retirees.
Connecticut, also facing a budget shortfall, increased taxes on its wealthiest corporations but found room in the budget to get rid of its income tax on military retirement pay, joining 14 other states that do not tax the pensions.
Most veterans have lived in many places. Plenty of websiteswith titles like Best Places for Military Retireescan help them weigh the fiscal pros and cons of where they choose to live. While decisions on where to live might not be based only on tax rates, theyre a factorand states know it.
Nine states have no income tax. Of the 41 that do, 14 of themAlabama, Hawaii, Illinois, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New Jersey, New York, Ohio, Pennsylvania and Wisconsinexempt all military pensions from taxation, according to the National Conference of State Legislatures. Another 20 provide a partial exemption, as does the District of Columbia. Seven statesCalifornia, New Mexico, North Dakota, Rhode Island, Utah, Vermont and Virginiaprovide no exemption.
But David Brunori, deputy publisher of Tax Analysts, a specialty publication, says any tax exemption of retirement income is bad policy.
Nationally, about 2.1 million military retirees are receiving pensions, according to the U.S. Department of Defense.
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Financial Planning In Retirement
Remember how your COLA changed almost every time you PCSd?
Your choice of living location will have huge implications in your retirement. The differences in the cost of living will be important to consider.
Other factors may include:
- Proximity to friends and family
- Civilian job opportunities
- Income taxes
If you move to a state that doesnt tax military retirement, what would you be able to do with that extra money?
Could you go on an extra vacation every year?
American Dream University can help you find the best opportunities you need to make these big decisions.
Military Retirement Pay Will Now Be Totally Exempt From State Income Tax In These Two States
Military retirees living in Arizona and Nebraska have received good news about their tax bills. In both the states, legislation has been signed that totally exempts military retirement pay from state income tax.
In Arizona the exemption officially went into effect on July 1, 2021, and will be retroactive to January 1, 2021.
For military retirees living in Nebraska, they will receive a total tax exemption beginning in 2022.
The push to obtain the tax breaks for military retirees has been a long process, and was spearheaded by the Military Officers Association of America .
MOAA members put pressure on lawmakers and the Governor to discuss the legislation until it was eventually passed.
The state of Arizona historically offered partial exemptions to military retirees and first responders, but it wasnt until now that they will be offering a full exemption.
Heres a list of other states who do not currently tax retired military pay:
- Alabama
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What Are The 10 Best States To Retire To
If youre ready to enjoy that sweet retiree life and you want to get a move on, here are the top 10 states retirees are moving to according to U.S. Census Bureau survey data studied by SmartAsset:
Were going to take a deeper look at each of these top 10 states, but first lets answer a few other questions that may be on your mind.
WHAT ARE THE BEST STATES TO RETIRE IN FINANCIALLY?
Cost of living is used to determine the affordability of a region. It takes into account healthcare, groceries & food, housing, transportation, etc. Now, theres a lot to consider when choosing your retirement home from weather and quality of life to taxes and cost of living* but if were looking at cost of living alone, these 10 states rank the best.
- State Income Tax: No income tax
- Cost of Living: 103
- Population 65+ years: 20.9%
Almost to be expected, Florida leads our list of best states to retire, as it is one of the most affordable places for retirees. Why? Florida is a very tax-friendly state with no state income tax and no tax on retirement income like Social Security hence why its considered a friendly state for people who want to enjoy their retirement fund to its fullest potential. The cost of living is 3% more than the national average, but the state doesnt have estate or inheritance taxes. And as a bonus, the average healthcare costs in the state are also below the national average spending per capita.
States That Dont Tax Military Retirement Because They Do Not Have An Income Tax
Some states are more friendly for retirees receiving retirement payments because none of their residents pay an income tax.
What a beautiful thing.
Here are the 9 states that dont have an income tax, and therefore they dont tax military retirement:
- Alaska
Vermont also has some of the highest income tax rates overall, just so you know.
Not to pick on Vermont.
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Is My Military Pay Subject To New York State And City Income Taxes
- If you are a New York State resident and your permanent home was in New York State when you entered the military but you were assigned to duty outside the state, you are still a New York State resident. Your military pay is subject to New York State income tax to the same extent it is subject to federal income tax.
- If you are a New York State resident required to file a return, use Form IT-201, Resident Income Tax Return.
If you are a nonresident, other income that you receive from New York State sources may be subject to tax. See Publication 361.
These rules apply for both New York City and Yonkers income tax purposes.
What Are The Tax Benefits Of Living In Oregon
Oregon has a fairly low tax rate. While Social Security payouts are not taxed by the state, other retirement income, such as withdrawals from retirement funds, is. Furthermore, both public and private pension income is taxed in part. Wages are taxed at the regular rate, with a marginal state tax rate of 9%. Employer-provided health insurance is also not taxed.
In addition, Oregon has some of the most generous tax breaks in the country for those who live here. For example, people can deduct their mortgage interest on their federal taxes even if they don’t itemize deductions on their state returns. Deductions of up to $750,000 can be taken against taxable income. In addition, someone may be able to deduct expenses incurred while traveling between homes in different states the home you live in alone can’t be considered your primary residence unless you plan to stay there for more than one year. If you’re moving to or from Oregon, consult a tax professional before filing your taxes to determine whether any of these credits might apply to you.
Finally, Oregon has no personal property tax. This means that anyone owning a business in the state will be able to claim the full cost of their office equipment as a deduction on their taxes.
In conclusion, Oregon offers many advantages if you decide to make it your new home.
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Us Territories & Possessions
Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Virgin Islands and Puerto Rico have their own independent tax departments. If you have income from one of these possessions, you may have to file a U.S. tax return only, a possession tax return only, or both returns. This generally depends on whether you are considered a resident of one of the possessions. In some cases, you may have to file a U.S. return, but be able to exclude income earned in a possession from U.S. tax. For more information, see the IRS International Taxpayer page.
Tax Assessment On Pay Complicate
What states do and dont consider assessable salary can be befuddling. For illustration, the 21 states specified dont apply charges on military retirement reserves. In any case, they do have charges on earned salary, meaning any money related increment you get from an employer. Nine states, in the mean time, not as it were excluded military retirement pay, but earned salary as well. Those incorporate Gold country, Florida, Nevada, Modern Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Another states where certain avoidances apply in terms of what is and isnt considered assessable salary incorporate South Carolina, Oregon, Oklahoma, North Carolina, Nebraska, Maryland, Kentucky, Indiana, Georgia and Idaho.
Takes off fair seven states California, Montana, Unused Mexico, Rhode Island, Utah, Vermont and Virginia that do completely assess military retirement pay. Of course, theres nothing fundamentally off-base with this reality, but its supportive to know so youll choose for yourself whether moving to a distinctive portion of the nation is beneficial in spite of no assess break on your military retirement funds.
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