Taxability of Military Pensions in the United States

The taxability of military pensions can be a complex issue, especially for veterans and retired service members. In this article, we will explore the various aspects of whether military pensions are taxable, including federal and state laws, exceptions, and the current tax status of these benefits. This information is crucial for anyone planning their financial future after military service.

Federal Taxes on Military Pensions

According to the Internal Revenue Service (IRS), military pensions are generally taxable at the federal level. These pensions are considered income, and they are subject to federal income taxes. However, unique to military pensions, there is an additional layer of complexity due to the unique tax provisions in place for these benefits.

Taxation by State

The taxation of military pensions by state governments varies widely. In some states, military pensions are taxable, while in others, they are not. The following are some states that tax military pensions to some extent:

It is important to note that this is not an exhaustive list, and the taxability of military pensions can change from year to year. It is always advisable to check with the local state tax authority for the most up-to-date information.

Exceptions to Taxation

There are also some exceptions to the taxation of military pensions. For instance, VA disability compensation is exempt from both federal and state income taxes. Additionally, certain awards, such as those for gallantry, may also be exempt from taxation.

State-Specific Cases

Some states, like Illinois, currently do not tax federal pensions. However, given the state's budgetary situation, it is possible that this policy may change. States like Illinois, which have extensive debt and a history of budget deficits, may consider tax changes in the future. It's essential to stay informed about state-level tax policies.

Retirement Pay and Survivors Benefit Plan

Retirement pay itself is subject to federal and state income taxes. However, there are some nuances to be aware of. For instance, if you opt into the Survivors Benefit Plan (SBP), a small amount of your pension is withheld and not taxed for the benefit of your family in the event of your death. Similarly, social security taxes do not apply to military pensions, which is a notable difference from other sources of income.

Personal and State Tax Experience

Many veterans report that they indeed pay taxes on their military pensions. This happens at the federal level and in most state instances. For example, the Defense Accounting and Finance Service adjusts your military pension by reducing it dollar for dollar to account for VA disability payments, effectively exempting these disability payments from double taxation.

Planning for the Future

Given the evolving nature of tax laws and the current tax status of military pensions, it is advisable to save and invest wisely. Throughout my military career, the retired pay system has undergone three significant changes, highlighting the need for service members to stay informed and plan accordingly.

In conclusion, understanding the taxability of military pensions is crucial for financial planning. Federal and state tax laws, exceptions, and state-specific policies all play a role in determining the tax status of these benefits. It is always best to consult with a tax professional or financial advisor for personalized advice.