Tax Tip of the Week | Taxes for Military Retirees
For the abundance of current and former armed service members here in Dayton and beyond, this article looks at the 10 states where retired veterans receive the least in tax benefits. Many states offer tax breaks for retirees and have additional tax breaks for veteran pensions while others do not. This article raises important questions for veterans to consider in their retirement planning.
The 10 Least Tax-Friendly States for Military Retirees
Unfortunately, some states aren't very generous when it comes to helping retired veterans at tax time.
If you spent your career in the military, you've probably lived all over the U.S. and around the world. But before you put down roots in retirement, find out how much of your hard-earned pension will be taxed. You'll pay tax to the federal government on military retirement pay that's based on age or length of service (disability pensions might not be taxed). With state taxes, though, it isn't always so clear.
Many states provide special tax breaks for military retirees or for retirement income in general. And, of course, some states don't even have an income tax. But some other states aren't so generous when it comes to helping retired veterans at tax time.
We've identified the 10 states (including Washington, D.C.) with the least-friendly income tax rules for military pensions. These states can tax at least part of a veteran's pension…and some tax the entire amount. We've listed the least tax-friendly of these states first. Take a look.
1. California
• Lowest tax rate: 1% (on up to $18,650 of taxable income for married joint filers and up to $9,325 for single filers)
• Highest tax rate: 13.3% (on more than $1,250,738 of taxable income for married joint filers and $1 million for single filers)
California offers retired military members no way to escape its high tax rates. The Golden State taxes 100% of a resident's income from military pensions, along with private, local, state, and other federal pensions. This applies to all military pension income received while a retiree is a California resident, regardless of where he or she was stationed while on active duty.
For more information about California taxes on seniors, see the California State Tax Guide for Retirees.
2. Vermont
• Lowest tax rate: 3.35% (on up to $67,450 of taxable income for married joint filers and up to $40,350 for single filers)
• Highest tax rate: 8.75% (on more than $248,350 of taxable income for married joint filers and more than $204,000 for single filers)
The Green Mountain State taxes 100% of income from military pensions, along with most other sources of retirement income.
The state also has a steep top income tax rate that could nick military retirees who have other sources of income.
For more information about Vermont taxes on seniors, see the Vermont State Tax Guide for Retirees.
3. Washington, D.C.
• Lowest tax rate: 4% (on up to $10,000 of taxable income)
• Highest tax rate: 8.95% (on more than $1 million of taxable income)
Despite the large number of government workers who call it home, Washington, D.C., offers no tax breaks for those who decide to retire there. A $3,000 exclusion for government pensions, including military pensions, was repealed in 2015.
(Note that the highest rate will be 10.75% on taxable income over $1 million beginning in 2022.)
For more information about Washington, D.C., taxes on seniors, see the District of Columbia State Tax Guide for Retirees.
4. Utah
• Tax rate: Flat tax of 4.85%
Utah didn't use to offer any special tax breaks for military retirees.
However, beginning with the 2021 tax year, a new tax credit is available for military retirement pay. The credit is calculated by multiplying the Utah income tax rate (4.85% starting with the 2022 tax year) by the amount of military retirement pay included in federal adjusted gross income.
For more information about Utah taxes on seniors, see the Utah State Tax Guide for Retirees.
5. Arizona
• Lowest tax rate: 2.59% (on up to $54,615 of taxable income for married joint filers and up to $27,8082 for single filers)
• Highest tax rate: 4.5% (on more than $500,000 of taxable income for married joint filers and more than $250,000 for single filers)
For the 2020 tax year, Arizona offered a tax exemption for military pensions — but it was a relatively small one. The exemption was only good for up to $3,500 of military retirement income. Other states with broad-based retirement income exemptions provided a better tax break for retired veterans. Fortunately, Arizona's income tax rates are relatively low.
But there's good news starting this year, though. Beginning with the 2021 tax year, all military retirement income is exempt from Arizona tax.
For more information about Arizona taxes on seniors, see the Arizona State Tax Guide for Retirees.
6. Montana
• Lowest tax rate: 1% (on up to $3,100 of taxable income)
• Highest tax rate: 6.9% (on more than $18,700 of taxable income)
The state provides an inflation-adjusted exemption for pension income (including military retirement pay), but veterans with a robust military pension probably won't qualify. For the 2020 tax year, the maximum exemption is $4,370. However, the exemption doesn't apply for veterans with federal adjusted gross income of $38,605 or more ($40,790 or more for joint filers). If both spouses receive pension income, married couples should check to see if each spouse could exclude $4,370 if separate returns are filed.
Beginning in 2024, the pension income exemption is repealed. Instead, taxpayers age 65 and older will be able to deduct up to $5,500 of any income (adjusted for inflation each year after 2024). In addition, starting in 2022, the top rate will be 6.75% on taxable income over $17,400. Then, beginning in 2024, the income tax rates and brackets will be substantially modified (there will only be two rates – 4.7% and 6.5%).
For more information about Montana taxes on seniors, see the Montana State Tax Guide for Retirees.
7. New Mexico
• Lowest tax rate: 1.7% (on up to $8,000 of taxable income for married joint filers and up to $5,500 for single filers)
• Highest tax rate: 5.9% (on more than $315,000 of taxable income for married joint filers and more than $210,000 for single filers)
Starting in 2022, the Land of Enchantment offers a limited and temporary tax break for military pensions. Up to $10,000 of military retirement pay is exempt from tax for the 2022 tax year. The exemption amount is increased to $20,000 for 2023, and then to $30,000 for 2024 to 2026. However, the exemption goes away after 2026.
In addition, people who are 65 or older may receive an $8,000 general income exemption, but to qualify, their adjusted gross income must be less than $28,500 for singles or $51,000 for married couples filing jointly. If you're at least 100 years old, all your income is exempt.
For more information about New Mexico taxes on seniors, see the New Mexico State Tax Guide for Retirees.
8. Oklahoma
• Lowest tax rate: 0.5% (on up to $2,000 of taxable income for married joint filers and up to $1,000 for single filers)
• Highest tax rate: 5% (on up to $12,200 of taxable income for married joint filers and up to $7,200 for single filers) [Starting in 2022, the lowest rate will be 0.25% and the highest rate will be 4.75%.]
Veterans in Oklahoma get some relief when it comes to state taxes on their pension. It just isn't a lot. The Sooner State lets veterans exclude either $10,000 or 75% of their military retirement benefits, whichever amount is greater, from their taxable income. The exemption only applies, however, to the extent the military pension is included in the federal adjusted gross income.
For more information about Oklahoma taxes on seniors, see the Oklahoma State Tax Guide for Retirees.
9. Virginia
• Lowest tax rate: 2% (on up to $3,000 of taxable income)
• Highest tax rate: 5.75% (on more than $17,000 of taxable income)
Congressional Medal of Honor recipients don't pay Virginia tax on income from a military retirement plan. However, other retired veterans do pay tax on their military pensions. The state does provide an age-based deduction against all income that is available to anyone who qualifies. Seniors born on or before January 1, 1939, can deduct $12,000. For those born after January 1, 1939, who are at least 65 years old, the deduction is reduced by $1 for every $1 that federal AGI exceeds $50,000 (or $75,000 for married filers).
For more information about Virginia taxes on seniors, see the Virginia State Tax Guide for Retirees.
10. Delaware
• Lowest tax rate: 2.2% (on taxable income from $2,001 to $5,000)
• Highest tax rate: 6.6% (on more than $60,000 of taxable income)
There are no special tax breaks in Delaware for military pensions. However, state law allows a modest exemption of up to $12,500 for pension and other retirement income paid to taxpayers age 60 and older (up to $2,000 for taxpayers younger than age 60). Eligible retirement income includes dividends, capital gains, interest, net rental income from real property and qualified retirement plans (e.g., IRAs, 401(k) plans, Keogh plans, and government deferred compensation plans). The general exemption is smaller than similar exemptions available in other states that do not fully exclude military pension income.
For more information about Delaware taxes on seniors, see the Delaware State Tax Guide for Retirees.
Credit Given to: Sandra Block, Rocky Mengle. Published March 1, 2022 in Kiplinger.
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.
This Week’s Author, Jordan Bradstreet
-until next week.
