States That Do Not Tax Military Retirement Pay

When it comes to taxes, it's generally safe to assume that if you earned income, it is taxable. However, in some circumstances, this actually is not the case. When it comes to military retirement pay, each state determines whether or not this income is taxable. The amount this pay is taxable varies from one state to another, from almost completely taxable to completely exempt. It is important to note that how states handle military retirement pay is different from how the federal government handles military pay.

Military retirement pay is usually fully taxable on the federal level. The only exemption is if the veteran is disabled. In many cases, retirement pay in this instance is not taxable. States, however, reserve the right to exempt military retirement pay from taxation, tax some of it or allow it to be completely taxable.

Nine states don't tax military retirement pay because they do not have a personal income tax. These states include Alabama, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. However, both New Hampshire and Tennessee do require that tax on dividends and interest on personal income be paid.

There are 21 states that have personal income tax but do not tax military retirement pay. These states are Alaska, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Dakota, Ohio, Pennsylvania, West Virginia and Wisconsin. It's important to note that this only applies to military retirement pay. Other forms of income might be taxable so a person should check with the Internal Revenue Service or a tax expert to see which forms of income are taxable.

Some states have special exemptions. For example, in Washington D.C., military pay is excluded from taxation up to $3,000 for individuals 62 years and older. Any amount above that is taxable. In Idaho, retirement military pay for individuals 65 or older or disabled and 62 years and older are exempt. In Arizona, military retirees can exclude up to $2,500 of their military retirement pay from state taxes. And in Kentucky, if the individual retired before 1997, their military retirement pay is exempt. If the person retired after 1997, any income over $41,110 is taxable.

Determining whether or not military retirement pay is taxable or not can be confusing, especially for those who are just starting to collect retirement pay. It is advised that people in this situation contact a tax professional or the Internal Revenue Service to determine whether or not their military retirement pay is taxable at the state level. It's better to lean toward the side of caution than to receive an unpleasant surprise from the state in the form of an audit or a large bill.