Maybe you’re preparing for your upcoming retirement or just want to get a better idea about your golden years. Either way, you need to know some things before retiring, especially if you’re a member of the Military.
Serving your country for all those years doesn’t always mean you’ll have less taxes to pay during retirement. As a matter of fact, you may be surprised by some states’ highest tax rates.
Besides federal government taxes, military retirees may also have to pay state taxes. This obviously varies from one state to another. While military retirement benefits are exempt from many states’ taxation and other states have no income tax at all, some states, however, are less generous with military retirees.
We’ve found 8 states that are the least tax-friendly for military retirees. Perhaps you’re already one of them, or maybe you’re about to be. Take a look at this article to find out which states have the authority to tax a small portion of even a good deal of a veteran’s pension.
1. California
If you live here, there is no way for military retirees to avoid California’s high tax rates. The Golden State taxes 100% of military pensions, as well as private, local, state, and other federal pensions.
That’s available to all military pension income received by a retiree while residing in California, regardless of where he or she was located while on active duty.
Here’s what you should know:
- Lowest tax rate: 1% (on taxable income of up to $18,650 for married joint filers and up to$9,325 for single taxpayers)
- Highest tax rate: 13.3% (on taxable income exceeding $1,250,738 for married joint filers and $1 million for single taxpayers).
2. Vermont
The Green Mountain State taxes 100% of military pension income, as well as a significant percentage of other sources of retirement income. Vermont also has a high top income tax rate, which may be a disadvantage for military retirees with other sources of income.
Below you can find more specific tax details:
- Lowest tax rate: 3.35% (on up to $67,450 of your taxable income for married joint filers and up to $40,350 for those who are single filers)
- Highest tax rate: 8.75% (for income above $248,350 for those married couples that file jointly their income tax returns and up to $40,350 for single filers).
3. Washington, D.C.
Despite the great number of government employees who live in Washington, D.C., this state doesn’t offer tax concessions for those who choose to retire there. In 2015, Congress abolished a $3,000 exception for government pensions, military pensions included.
These are the tax rates as follows:
- Lowest tax rate: 4% (on up to $10,000 of your taxable income)
- Highest tax rate: 8.95% (on taxable income that is over $1 million).
Note that the top rate will be 10.75% on taxable income of more than $1 million beginning in 2022.
A financial advisor in Washington State can assist you with retirement planning and other financial goals. Financial advisors can also assist with investment and financial planning, such as taxes, mortgages, and insurance to ensure you have the right plan for the future.
4. Utah
- Tax rate: Flat tax of 4.85%.
Utah used to provide no special tax credit to military retirees. However, starting with the 2021 tax year, a new tax break for military retirement pay is available.
The credit is determined by multiplying the Utah income tax rate (4.85% beginning with 2022) by the total amount of military retirement pension listed in federal adjusted gross income (or federal AGI).
This relatively new law exempts both military retirement pay and Survivor Benefit Plan benefits that are paid to some surviving relatives of military retirees. The change also exempts certain Social Security benefits paid from income tax. Still, military retirees can only request one additional income exemption per tax return.
5. Virginia
Congressional Medal of Honor recipients don’t pay Virginia tax on their pensions. Other military retirees, on the other hand, pay taxes on their military retirement plans. The state does offer an age-based deduction against all income to everyone who qualifies.
Those born on or before January 1, 1939, are eligible for a deduction of $12,000. For veterans born after January 1, 1939, the deduction is lowered by $1 for every $1 that federal adjusted gross income exceeds $50,000 (or $75,000 for married filers).
Here are the numbers:
- Lowest tax rate: 2% (on up to $3,000 of taxable income)
- Highest tax rate: 5.75% (on taxable income exceeding $17,000).
6. Montana
This state has provided support to retirees by offering an inflation-adjustment exemption for pension income (military retirement pay included). Note that veterans with a substantial military pension are unlikely to qualify.
The highest exemption for the 2020 tax year was $4,370. This tax break, however, isn’t available to military retirees who get a federal adjusted gross income of $38,605 or more ($40,790 or more for joint filers). If both you and your spouse receive pension income, then you should verify to see if each one of you could exclude $4,370 if separate returns are submitted.
The pension income exemption will be repealed starting in 2024. Instead, Montana’s residents aged 65 and older will be able to deduct up to $5,500 of their total income (after 2024, this fixed amount will be annually adjusted for inflation).
Furthermore, beginning in 2022, the highest rate on taxable income over $17,400 will be 6.75%.
7. New Mexico
Starting this year, the Land of Enchantment provides a temporary and limited tax break for military retirees. Let’s say you live in New Mexico and you’re a military retiree. If you receive a military retirement pay of up to $10,000, you won’t have to pay any taxes (exemption available during the 2022 tax year).
The exemption level will be raised to $20,000 in 2023, then to $30,000 for 2024 to 2026. The exception, however, will expire in 2026.
Below you can find more specific tax details:
- Lowest tax rate: 1.7% (on taxable income up to $8,000 for married joint filers and $5,500 for single filers)
- Highest tax rate: 5.9% (on taxable income of more than $315,000 for married joint filers and more than $210,000 for single taxpayers).
Also, people aged 65 or over may qualify for an $8,000 general income exemption if their adjusted gross income is less than $28,500 for singles or $51,000 for married joint filers. If you’re a centenarian, your entire income is tax-free.
8. Oklahoma
As a military retiree in Oklahoma, you have to pay state taxes on your pension. Luckily, compared with other US states, it’s really not much.
Veterans in Oklahoma can deduct either $10,000 or 75% of their military retirement benefits from their taxable income. Any option from these two is pretty convenient. There is one thing though: the exemption only applies if the military retired pay is included in the federal adjusted gross income.
These are the tax rates as follows:
- Lowest tax rate: 0.25% (on taxable income of up to $2,000 for married couples filing jointly and $1,000 for single taxpayers)
- Highest tax rate: 4.75% (on taxable income of up to $12,200 for married couples filing jointly and $7,200 for single taxpayers).
For more information about taxes in retirement, here’s another article you may find interesting: This Is How All 50 States Tax Your Retirement Income.
