What Your Military Pension Actually Costs You in Taxes

The days of BAH and BAS sure were sweet. But they are long gone at retirement. Service members who spent 20-some years getting paychecks with tax-free allowances may be disappointed at what they find in their first retirement check. It turns out a military pension is fully taxable federal income, and depending on where you live, the state is taking its share too.

That said, it behooves those close to retirement to plan for these taxes in their separation budgets, because taxes can cost military retirees thousands of dollars every year, which could be an absolute disaster if they don’t plan for them. 

Being unaware of taxable income might sound ridiculous to some people, but the IRS begs to differ. Around half of all unpaid taxes by current and retired federal employees are owed by retired military members.

If anything, this should make you wonder what you might be missing. 

The major life change of leaving military life is abrupt. And the fact that your pension is treated like a paycheck for tax purposes seems like a slap in the face, especially when a retiree ends up paying more in taxes on a lower gross income than they received on active duty. But if you know it’s coming, you can plan for it. 

Uncle Sam’s Cut of Your Action

At the federal level, the taxes are straightforward, even if their impact is outsized. Military retirement pay is a pension and is reported on a Form 1099-R. That’s a very bureaucratic, professional way of saying “standard income tax rates apply.” 

Sadly, there is no single blanket federal exemption for military retirement pay, even one based on years of service. 

One big exception that applies to most retirees is actually separate from their retirement pay, but can still muddle their retirement budgeting, and that is VA disability compensation. Veterans who receive payments from the Department of Veterans Affairs for service-connected disabilities pay no federal income tax on it, regardless of the rating.

The difference between a military pension and VA disability compensation is the most common source of confusion—and cause of tax errors—for retirees leaving the service. They’re separate entitlements administered by separate agencies, and tax laws treat them that way.

For retirees who receive both, two concurrent programs add further complexity. Concurrent Retirement and Disability Pay (CRDP) allows retirees to receive both military retired pay and VA disability compensation without the traditional dollar-for-dollar offset. CRDP payments are taxable as retired pay. 

Combat-Related Special Compensation (CRSC) provides a separate payment for retirees whose disabilities are directly linked to combat. CRSC is non-taxable and is issued as a distinct disbursement from DFAS specifically because it can’t be combined with taxable retired pay in a single payment.

Retirees eligible for both programs must choose between them during an annual open season and may change their election each year based on which provides the greater financial benefit.

If this is hard to understand at first glance, that’s understandable. I don’t fully understand it either, and I researched and wrote this. As a retiree, you can (and probably should) talk to a qualified Veterans Service Officer through organizations like the VFW or American Legion to provide a more complete explanation so you can make the best decision for you. 

Another federal tax offset to note is that the monthly premium a retiree pays to participate in the Survivor Benefit Plan, which provides a continuing annuity for a surviving spouse or eligible dependents upon the retiree’s death, is excluded from taxable income. 

While paying for the SBP sucks, its cost is a pre-tax deduction, lowering your tax liability. Your spouse will thank you one day, but you’ll be dead, so you won’t hear it.   

There is a slim (so very slim) possibility for change in this federal tax. The Tax Cuts for Veterans Act of 2025, introduced in the Senate as S.1108 in March 2025 and as H.R.6190 in the House in November 2025, would change tax laws to exclude all military retirement and related benefits from federal income tax.
As of April 2026, both bills remain in committee, with no floor vote scheduled. So… don’t get your hopes up. 

States Tax by Their Own Rules

State taxes are where retirees have the most agency, and where the stakes can change most significantly over decades of retirement. The difference between settling in a state that fully exempts a military pension and a state that fully taxes one can really add up to a lot over time.

Nine states have no personal income tax at all; 28 states with income taxes fully exempt military retirement pay; 13 states offer partial exemptions; and the District of Columbia fully taxes military retirement income. For up-to-date information, the Army’s Soldier For Life program keeps tabs on states’ retirement laws.

States With No Personal Income Tax

The simplest situation for a military retiree is a state that imposes no personal income tax at all. In these nine states, military pension income, along with most other forms of personal income, faces zero state income tax liability. None. Like, at all. 

Those states are: 

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Washington

• Wyoming 

While zero state income tax sounds glorious, it’s important to keep in mind that states get their money in other ways. Tennessee, Florida, Texas, and Washington, for example, have the highest combined sales taxes in the country. 

States Exempt Military Retirement Taxes

In the 28 states that do have a personal income tax but exempt military retirement from those taxes, the pension itself faces no state income tax, while other forms of income, such as wages from a post-military career, investment returns, or Social Security, will still be taxed at standard rates.

Those states are: 

• Alabama 

• Arizona 

• Arkansas

• Connecticut

• Hawaii

• Illinois

• Indiana

• Iowa

• Kansas

• Louisiana

• Maine

• Massachusetts

• Michigan

• Minnesota

• Mississippi

• Missouri

• Nebraska

• New Jersey

• New York

• North Carolina

• North Dakota

• Ohio

• Oklahoma

• Pennsylvania

• Rhode Island

• South Carolina

• West Virginia

• Wisconsin

Be sure to check the tax laws in your own state (or the state you want to be in) because things change, as you’re about to see, when states stop taxing military retirement pensions. Usually, that change is a noticeable boom in veteran populations. You know we love a military discount, even when it’s just for living somewhere.

Partial Tax Exemptions

Thirteen states represent the most variable category: jurisdictions that exempt some portion of military retirement income but subject the remainder to state income tax. The rules vary significantly, with exemptions tied to age, income level, flat-dollar caps, or a combination of those

California had long held an unenviable distinction as the only state without an exemption for military retirement pay. That changed in 2025. A provision enacted as part of the state's 2025-26 budget and codified in the official California Franchise Tax Board instructions allows a qualifying taxpayer to exclude up to $20,000 of military retirement pay or Survivor Benefit Plan annuity income from state income taxes each year. 

The exclusion applies to single filers with an adjusted gross income below $125,000 and to joint filers with an adjusted gross income below $250,000. It applies to all uniformed services, including the U.S. Public Health Service and NOAA Corps. This exclusion will expire after tax year 2029 unless the legislature renews it.

Colorado allows a sliding-scale deduction for military retirement pay. Retirees under age 55 may exclude up to $15,000 of military retirement income annually. Those 55 and older may exclude up to $24,000. Any military pension income above those thresholds is taxed at Colorado's standard income tax rate.

Delaware provides a $25,000 retirement income exclusion for all military pensioners.

Georgia underwent one of the most significant recent changes in the country. A May 2025 law increased the exemption for military retirement pay to $65,000 for the 2026 tax year, a substantial expansion from the prior structure, which had allowed retirees of all ages to exempt $17,500 annually, with an additional $17,500 available for those with earned income above that threshold, and higher ceilings for retirees 62 and older. Under the new law, the $65,000 ceiling applies regardless of age. 

Idaho provides a retirement income deduction that includes military retirement pay, though the state taxes income above the deductible threshold at its standard rates.

Kentucky offers a pension income exclusion for up to $31,110 in military retirement pay annually. Income above that threshold is subject to Kentucky's flat income tax rate.

Maryland exempts a portion of military retirement income that scales with age. For retirees under 55, the exclusion is limited to $12,500. For those 55 and older, it increases to $20,000. Advocacy groups continue to push for a full exemption in the state.

Montana allows a partial military retirement tax deduction, subject to certain conditions. Limited to just five years, the law is open to retired pensioners who established residency after July 30, 2023. It’s probably best to check with the Montana Department of Revenue to find out what your individual benefit is.

New Mexico currently exempts $30,000 in military retirement income annually for tax years 2024 through 2026, having previously exempted $20,000 under a prior provision. The temporary nature of the exemption means retirees in New Mexico should keep an eye on new legislation heading for the coming years.

Oregon provides a partial exemption for military retirees who served before Oct. 1, 1991.

Utah doesn’t directly exempt military retirement; it provides a retirement income tax credit equal to 4.55% of retirement income, which, in practice, significantly reduces or eliminates the state tax burden for most military retirees.

Vermont passed a tiered exemption for military retirement pay and survivor benefits on Jun, 25, 2025. Military retirement and SBP pay are exempt for taxpayers with a federal adjusted gross income (AGI) of $125,000 or less. Those with an AGI of $175,000 or more are not.

A full exemption has not yet been enacted in Virginia, but it allows a deduction of up to $30,000 of eligible military benefits for the 2025 tax year and $40,000 for the 2026 tax year and subsequent years.

Understanding the legislation in any state is important for retirees making long-term decisions about where to live. No state has moved to increase taxation of military retirement pay. Every change has been in the direction of relief: new exemptions, expanded deductions, or raised thresholds. The arc of history bends toward justice.

What Retirees Should Do 

Like anyone leaving the military, having a holistic picture of your finances after separation (hopefully before you separate) is the first step. 

The first and most actionable decision is where to live, and choosing for reasons other than sunshine or cheap drinks is probably a good way forward. 

For those already retired and living in a partial-tax state, closely following any exemptions, deductions, and/or pending legislation is worth the effort. Any tax laws could change, expand, or expire based on future legislative sessions. 

You also might want to move to a state where the overall cost of living isn’t so high. But that’s not tax advice, that’s just good advice.

Retirees with significant VA disability ratings should fully understand the CRDP versus CRSC election. A careful annual review with a VSO could save significant amounts of cash. Your non-taxable CRSC can be a more advantageous option for some retirees, even if the dollar amount itself is lower than CRDP. 

All this is to say that the gap between what a service member expects their retirement income to look like and what they actually deposit can be addressed well before retirement orders are signed. It just takes a little bit of planning.