How Much of Military Retirement is Taxed?
The military retirement benefits are a well-deserved reward for the sacrifices and dedication of military personnel. However, the tax implications of these benefits can be complex and confusing. In this article, we will explore how much of military retirement is taxed and what you need to know to make the most of your benefits.
Direct Answer: How Much of Military Retirement is Taxed?
The amount of military retirement that is taxed depends on several factors, including the type of retirement benefit, the individual’s income level, and the state they reside in. Here are some general guidelines:
- Basic Allowance for Housing (BAH): BAH is taxable and subject to federal income tax.
- Cost-of-Living Allowance (COLA): COLA is taxable and subject to federal income tax.
- Disability Retirement: Disability retirement benefits are taxable and subject to federal income tax.
- Regular Retirement: Regular retirement benefits are taxable and subject to federal income tax, but the first $20,000 of the annual benefit is exempt from state income tax.
- Survivor Benefits: Survivor benefits are taxable and subject to federal income tax.
Tax-Free Portion of Military Retirement
The first $20,000 of the annual military retirement benefit is exempt from state income tax. This means that the first $20,000 of your annual benefit is not subject to state income tax, regardless of your income level. However, the amount above $20,000 is subject to state income tax.
Federal Income Tax
Military retirement benefits are subject to federal income tax. The tax rate on military retirement benefits is the same as the tax rate on other types of income, such as wages and salaries. The tax rate ranges from 10% to 37%, depending on your income level.
State Income Tax
The tax rate on military retirement benefits varies by state. Some states do not tax military retirement benefits at all, while others tax them at a higher rate. Here is a breakdown of the states that do not tax military retirement benefits:
- Alabama: No state income tax
- Alaska: No state income tax
- Florida: No state income tax
- Nevada: No state income tax
- New Hampshire: No state income tax (but has a flat 5% state tax on dividends and interest)
- South Dakota: No state income tax
- Tennessee: No state income tax (but has a state tax on dividends and interest)
- Texas: No state income tax
- Washington: No state income tax
- Wyoming: No state income tax
Other Factors to Consider
In addition to the type of retirement benefit and your income level, there are several other factors to consider when it comes to taxes on military retirement benefits. These include:
- Inflation Adjustments: The annual cost-of-living adjustment (COLA) is taxable, but the inflation adjustment to your retirement benefit is not.
- Service-Connected Disability: If you are receiving a service-connected disability retirement benefit, you may be eligible for a waiver of the federal income tax on that benefit.
- Spousal Benefits: If you are receiving a spousal benefit, you may be eligible for a waiver of the federal income tax on that benefit.
- ROTC Scholarship: If you received a ROTC scholarship, you may be required to pay taxes on the scholarship benefits.
Table: Tax Rates on Military Retirement Benefits
| State | Tax Rate |
|---|---|
| Alabama | 0% |
| Alaska | 0% |
| Arizona | 2.59% – 4.54% |
| Arkansas | 5.9% – 7.0% |
| California | 9.3% – 13.3% |
| Colorado | 5.0% – 8.25% |
| Connecticut | 3.0% – 6.99% |
| Delaware | 2.0% – 6.95% |
| Florida | 0% |
| Georgia | 1.0% – 5.75% |
| Hawaii | 8.25% – 11.25% |
| Idaho | 6.925% – 7.4% |
| Illinois | 4.95% – 7.95% |
| Indiana | 3.23% – 3.4% |
| Iowa | 6.0% – 8.98% |
| Kansas | 5.2% – 5.6% |
| Kentucky | 5.0% – 6.0% |
| Louisiana | 2.0% – 6.0% |
| Maine | 5.8% – 7.15% |
| Maryland | 5.0% – 5.75% |
| Massachusetts | 5.2% – 12.4% |
| Michigan | 4.25% – 4.35% |
| Minnesota | 5.35% – 9.85% |
| Mississippi | 5.0% – 5.0% |
| Missouri | 5.2% – 5.2% |
| Montana | 6.9% – 6.9% |
| Nebraska | 6.84% – 7.84% |
| New Jersey | 6.37% – 8.97% |
| New Mexico | 4.9% – 5.9% |
| New York | 4.0% – 8.82% |
| North Carolina | 5.25% – 5.75% |
| North Dakota | 2.9% – 5.9% |
| Ohio | 2.35% – 4.24% |
| Oklahoma | 5.0% – 5.0% |
| Oregon | 9.0% – 9.9% |
| Pennsylvania | 3.07% – 3.07% |
| Rhode Island | 3.75% – 6.99% |
| South Carolina | 7.0% – 7.0% |
| South Dakota | 0% |
| Tennessee | 0% (but has a state tax on dividends and interest) |
| Texas | 0% |
| Utah | 4.95% – 5.95% |
| Vermont | 3.55% – 8.95% |
| Virginia | 2.0% – 5.75% |
| Washington | 0% |
| West Virginia | 3.0% – 6.5% |
| Wisconsin | 4.4% – 7.65% |
| Wyoming | 0% |
Conclusion
In conclusion, the amount of military retirement that is taxed depends on several factors, including the type of retirement benefit, the individual’s income level, and the state they reside in. The first $20,000 of the annual military retirement benefit is exempt from state income tax, and the tax rate on military retirement benefits is the same as the tax rate on other types of income. By understanding the tax implications of military retirement benefits, military personnel can make informed decisions about their finances and plan for their financial future.
