Navigating taxes as a military retiree can be challenging, especially when it comes to understanding what is taxable and what is not. While traditional military retirement pay is federally taxable, other compensation, including benefits from disability are generally exempt from federal taxes.
At the state level, most states offer full or partial exemptions for military retirement income, although this isn’t universal. For example, California and Washington, D.C., still fully tax military pensions, while most other states either don’t tax this income at all or only partially tax it.1
Veterans transitioning into civilian life may also face some unexpected income tax surprises. Working as an employee or consultant by either of both spouses, as well as income from investments or rental activities in addition to military retirement pay often bumps veterans into higher federal tax brackets. Adjusting tax withholdings or using tools like the IRS Tax Withholding Estimator can help minimize unexpected income tax obligations, penalties, and interest when filing.
State and federal tax benefits
Military retirees can take advantage of several tax breaks at both the federal and state levels, including:
- Disability benefits: Disability compensation and retirement pay from the Department of Veterans Affairs (VA) are excluded from gross income and are not subject to federal taxes. Certain dependent care assistance programs also qualify for tax exemptions.
- Education benefits: Education or training payments provided by the VA are not considered taxable income, making them another valuable tax break.
- Special refunds: Some situations, such as an increase in VA disability ratings or eligibility for combat-related special compensation, may allow veterans to claim a federal tax refund. This often requires filing an amended tax return within three years of the original due date.
Note: Eligibility rules and requirements vary, so not all tax benefits are available to all retired military members. Veterans may need to file a tax return to claim disability deductions or exemptions. If your income changes, you should re-evaluate eligibility and file an amended return if necessary. Special tax considerations may also require filing an amended return. Evaluate your disability exemptions and deductions annually and consult a trusted tax advisor.
Property tax relief for disabled veterans
Many states offer property tax exemptions to disabled veterans. Eligibility rules vary, but these exemptions can significantly reduce property tax bills for those who qualify. Retirees aged 65 or older may also be eligible for additional property tax relief. Review your state’s specific guidelines to see what benefits may apply.
Do veterans and military members qualify for the earned income tax credit (EITC)?
The earned income tax credit (EITC) is a valuable benefit often overlooked by eligible veterans and military households, individuals with disabilities, those living in nontraditional homes, and households with no children.
For the 2024 tax year, individuals with earned income under $66,819 may qualify for the EITC. Veterans, military families, and even individuals without children may be eligible. According to the IRS, as of Dec. 2023, approximately 23 million workers and families received about $57 billion in EITC. The average amount of EITC received nationwide in 2022 was about $2,531.2
States that don’t tax military retirement income
Most states offer generous tax breaks on military retirement income. However, there are exceptions:
- Fully taxing states: California and the District of Columbia fully tax military pensions.
- Partial taxing states: Some states, including Georgia, Idaho, Kentucky, and Virginia, only partially exempt military retirement income from taxes.
Tax laws affecting veterans can be complex, so it’s important to stay informed. Evaluate your eligibility for various tax breaks, adjust withholdings as needed, and consult a qualified tax advisor to ensure you’re maximizing benefits while minimizing tax burdens. or more information, contact your advisor. Not a Mercer Advisors client but interested in more information? Let’s talk.
| Do you have questions about navigating your military benefits? From retirement to healthcare and VA loans, one of our Sr. Wealth Advisors – a former Navy service member – has created a helpful guide. Read it here. |
1 Absher, Jim, and Amanda Miller. “Military Retirement and State Income Tax.” Military.com, 17 July 2024.
2 “Statistics for Tax Returns with the Earned Income Tax Credit (EITC).” Earned Income Tax Credit, IRS.
