If you’re a veteran planning for retirement, here’s an important fact: your military retirement pay is taxed by the IRS just like any other pension. But when it comes to state income taxes, things get a bit tricky—and the rules can vary widely depending on where you live.
Many veterans don’t realize that state tax laws treat military pensions differently. This can significantly affect your take-home income and your monthly budget. Choosing the right state to settle in can make a big difference in your financial comfort during retirement.
In this article, we’ll break down how various states tax military retirement pay. We’ll also highlight some of the most veteran-friendly states and those where you may pay more taxes than expected.
California: The State That Taxes Your Military Pension Fully
California is unique — and not in a good way for veterans. It’s the only state that taxes 100% of military retirement pay. This means your pension is treated just like any other retirement income and subject to state income tax.
Veterans hoping for relief here may be disappointed, as attempts to exempt military pensions have stalled. So if you’re considering retirement in California, be ready to factor this tax into your budget alongside the state’s already high living costs.
Colorado: Partial Tax Breaks Based on Your Age
Good news for veterans in Colorado: the state offers partial exemptions on military retirement pay based on your age.
- Under 55? You can subtract up to $15,000 from taxable income through 2028.
- Age 55 to 64? Exclusion increases to $20,000.
- Age 65 or older? You get up to $24,000 excluded.
Colorado also doesn’t tax Social Security benefits, making it a fairly friendly option for military retirees.
Delaware: Some Relief, Especially for Disabled Veterans
Delaware taxes military retirement pay but offers income exclusions to reduce the burden:
- Up to $2,000 excluded if you’re under 60
- Up to $12,500 if you’re 60 or older
A major plus for Delaware veterans is that military disability retirement pay is exempt from state income tax, which can bring big savings for disabled vets.
Do note that Wilmington, Delaware, adds its own local income tax, so your city matters here.
Washington D.C.: A High-Tax Area with Limited Breaks
Washington D.C., while not a state, fully taxes military retirement pay much like California.
Tax rates here can be steep, reaching up to 10.75% for some residents. There is a small exemption of up to $3,000 for veterans aged 62 or older, but it only applies to tax years before 2015.
If you’re thinking of retiring in D.C., expect a heavier tax burden on your military pension.
Georgia: A Veteran-Friendly Tax Climate
Georgia offers generous exemptions on military retirement pay.
- Veterans under 62 can exclude up to $17,500 of their pension income.
- Spouses can also exclude the same amount, doubling potential savings for married couples.
- Veterans 65 and older get exclusions up to $65,000.
Georgia also doesn’t tax Social Security benefits, making it a popular choice for veterans seeking to stretch their retirement income.
Idaho: Age and Disability Affect Exemptions
In Idaho, only veterans who are 65 or older or 62+ with a disability qualify for pension income exclusions.
Last year’s maximum exclusion was about $41,140, though it’s adjusted annually.
Idaho does not tax Social Security or railroad retirement benefits, which can ease the overall tax load.
Kentucky: Special Treatment for Military Service
Kentucky’s retirement income exclusion is around $31,110.
If you served before 1998, your military pension portion is fully exempt from state income tax.
For service after 1998, taxable income is calculated using a special worksheet, which often reduces tax liability.
Kentucky also exempts Social Security benefits, adding to its appeal for military retirees.
Maryland: Modest Military Pension Exemptions
Maryland offers:
- $20,000 income exclusion for veterans 55 and older
- $12,500 exclusion for those under 55
- Pension exclusions up to $39,500 for retirees 65 and older or with disabilities
Social Security and railroad retirement benefits are also exempt in Maryland.
Montana: New Partial Exemption Starting 2024
Starting this year, Montana allows veterans to exclude up to 50% of military retirement pay from state income tax for up to five years.
You must be a Montana resident after mid-2023 or start receiving military income after moving there.
Tax rates on remaining taxable income range from 4.7% to 6.5%.
Note: Social Security benefits are taxed; railroad benefits are exempt.
Other States with Notable Veteran Tax Policies
- New Mexico excludes up to $30,000 through 2026. Social Security is generally not taxed due to high income thresholds.
- Oregon exempts military service before October 1991 entirely, with partial exemptions for later service. Social Security and railroad benefits are tax-free.
- Vermont offers a small $10,000 exclusion but doesn’t allow you to claim it along with Social Security benefits.
- Virginia is raising its military retirement income exclusion to $40,000 starting 2025 and has removed previous age restrictions.
Final Thoughts: Where You Live Matters
Retirement is about more than just finding a nice place to live—it’s about your financial future.
A few hundred dollars saved each month on taxes can add up to thousands over the years.
Before you decide where to settle down, take time to review your state’s current military pension tax rules.
Talking to a tax expert familiar with veterans’ benefits can also help you plan smarter.
Remember: the best retirement state for you balances lifestyle, tax advantages, and quality of life.
“This article was written by Mathew Owen. AI tools were used lightly for grammar and formatting, but the ideas, words, and edits are all mine.”
