Does Oregon Tax Military Retirement?
Oregon, like many other states, has a tax policy regarding military retirement pay. It’s essential to understand the rules and regulations surrounding taxes on military retirement in Oregon to avoid any unexpected financial surprises.
What Does Oregon Tax Military Retirement?
Oregon taxes a portion of military retirement pay, including:
• Military pensions: All military pensions are taxable, including those earned from service prior to January 1, 2017, which were previously exempt.
• Cost-of-living adjustments (COLAs): COLAs received as part of military pension payments are taxable.
• Supplemental payments: Payments received from the Department of Defense, such as separation pay or rehabilitation payments, are taxable.
• Inflation-Indexed Military Pensions: As of 2022, the Department of Veterans Affairs (VA) increased inflation-indexed pension rates to account for changes in cost of living. Oregon will tax the increased pension payments.
However, Veterans’ Dependency and Indemnity Compensation (DIC) and Disability Compensation (VA Benefits) are not considered income and are exempt from state income tax in Oregon.
Exemptions and Deductions
While Oregon taxes military retirement pay, there are certain exemptions and deductions that may help reduce the amount of taxes owed:
• Oregon Veterans’ Tax Exemption: Oregon allows a $25,000 exemption on retirement pay for qualified veterans.
• State-specific deduction: Oregon provides a $5,000 deduction on retirement income, including military pensions, for eligible residents.
• Federal Itemized Deduction: Claiming federal itemized deductions on state tax returns can help reduce taxes owed on military retirement income.
Tax Withholding and Reporting
Withholding:
• The Internal Revenue Service (IRS) and the Oregon Department of Revenue (DOR) both withhold taxes on military retirement pay.
• Withholding rates may vary depending on individual circumstances.
• Service members should report changes in income or life circumstances to ensure accurate withholding.
Reporting:
• The IRS and Oregon DOR require reporting of military retirement income on Form W-2 (Employee’s Wage and Tax Statement) and Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.).
• Service members should receive both forms annually, indicating taxable military retirement income.
Tips and Strategies
• Plan ahead: Understanding tax implications of military retirement pay helps plan and prepare for the transition from military service.
• Consult a tax professional: Enlist the help of a tax expert to navigate Oregon tax laws and maximize tax savings.
• Adjust withholding: Adjusting withholding rates to avoid underpayment or overpayment can reduce financial burdens.
• Explore veterans’ organizations: Utilize resources and services provided by veterans’ organizations, such as the American Legion, to aid in understanding tax implications and filing taxes.
Comparison of Oregon Military Retirement Tax to Other States
Oregon is not unique in taxing military retirement pay. 43 states, including Oregon, tax at least a portion of military retirement pay. Some states provide more exemptions or deductions, while others impose more taxes. See the following table for a comparison:
| State | Exemptions | Deductions | Withholding |
|---|---|---|---|
| Oregon | $25,000 (veterans’) + $5,000 (state-specific) | $5,000 | Federal and state withholding |
| California | $5,000 | $1,000 (state-specific) | State withholding |
| Florida | $10,000 (veterans’) + $20,000 (state-specific) | ||
| Texas | $5,000 | State withholding |
Keep in mind that tax laws are subject to change, so it’s essential to verify information before making decisions.
Conclusion
In summary, Oregon taxes a portion of military retirement pay, including pensions, COLAs, and supplemental payments. However, Veterans’ Dependency and Indemnity Compensation (DIC) and Disability Compensation (VA Benefits) are exempt. Understanding tax implications, including exemptions and deductions, withholding, and reporting, is crucial to making informed financial decisions. Plan ahead, consult a tax professional, and adjust withholding to optimize tax savings. While some states may provide more benefits, understanding Oregon’s military retirement tax laws can help service members make informed decisions about their finances.
