Tax Free Military Retirement Pay In These States

Robert Haynes
Tax Free Military Retirement in These States
Recently, the states of Arizona, Indiana, Nebraska, North Carolina, and Utah became the newest additions to the list of states who do not tax the pay of military retirees. There are now 26 states that do not tax military retirement pay.
The State of Impact
The tax exemptions for retirees in Arizona, North Carolina, and Utah have already taken effect. For Indiana and Nebraska, however, those changes will happen during the 2022 tax season.
Additionally, Arizona, North Carolina, and Utah have retroactively dated the changes to January 1, 2021. This means that retirees who paid taxes during that time frame will be refunded that money when they file their taxes.
Cha-ching!
RELATED: Save Money with Free Tax Filing for the Military
Indiana
Indiana has taken a tiered approach to exempting military retired pay. For the 2020 tax year, veterans can deduct the first $6,250 of retired pay, in addition to a deduction of 50% of the retired pay above the $6,250 mark. For the 2021 tax year, the percentage of additional deductions jumps to 75%. In 2022 and beyond, all military retired pay in Indiana is not taxed.
>> Have a question about your or your spouse’s military benefits? We’ve partnered with the Veterans Education Project to help find the answers you need. Find the answers to your benefits questions today!
Nebraska
In Nebraska, retired service members may exclude 100% of their military retired pay beginning on 1 January, 2022.
For previous tax years that have not been filed, retirees must make a one-time election to exclude portions of their military pay. There are two options:
- Option 1 – Retirees can exclude 40% of their retired pay for seven consecutive tax years.
- Option 2 – Retirees can exclude 15% of their retired pay for all taxable years starting from the year they turn 67.
For more information about these options, read Nebraska’s Election to Exclude Military Retirement Pay for a more comprehensive understanding of this policy.
For most of these five states, their previous tax benefits for retirees was simply a cap on the amount they could deduct from their retirement pay.
Survivor Benefit Plan Recipients
Among these five states, all but one have exempted from state taxes payments to surviving spouses and family members under the Survivor Benefit Plan (SBP).
The states of Arizona, Indiana, North Carolina, and Utah no longer tax SBP payments. Nebraska, however, has not exempted SBP payments from their state tax requirements.
States That Do Not Tax Military Retired Pay
The following states do not tax (or will not tax) military retired pay:
- Arizona
- Alabama
- Arkansas
- Connecticut
- Hawaii
- Illinois
- Indiana
- Iowa
- Kansas
- Louisiana
- Maine
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Pennsylvania
- Utah
- West Virginia
- Wisconsin
And, just for good measure, the following states do not collect income tax from their citizens:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
This means that military retirees in these states do not pay taxes on their pensions.
Reasons for Tax Changes
There are hundreds of thousands of military retirees scattered across this great country, and even around the globe. It is no secret that there are some veteran friendly states, and then there are other states whose policies are not as welcoming.
As a retiree myself, I understand the importance of knowing how my retired pay is treated by the state in which I reside. Arizona has a remarkably dense retiree population, so it is likely that pressure from that growing demographic has prompted some of these changes.
These recent additions to the tax-free list of states brings us over the half-way mark. We will see what comes in the next few years regarding tax relief on the pay to our military retiree community.
>> Have a question about your or your spouse’s military benefits? We’ve partnered with the Veterans Education Project to help find the answers you need. Find the answers to your benefits questions today!
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About the author
Robert Haynes is a retired Army infantryman who has a squad of kids and is married to an active duty Soldier. He is a veteran of Operation Iraqi Freedom, who spent his last few years in the Army as a Drill Sergeant. He is now a full-time dad, freelance writer, and out-of-work comedian.