Some Veterans are unsure about how their military service affects their taxes. The fact is that military retirement pay is taxable at the federal level, while disability compensation benefits and disability retirement pay are generally exempt.
Additionally, most states don't tax military retirement income or they only partially tax it. (More on that later). However, the District of Columbia and California fully tax military pensions.
It should be noted that military retirees may be surprised by the amount of federal income tax they owe when filing their first tax return after leaving the service.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
According to the IRS, military retirement income combined with income from a civilian job or a spouse's income, can push Veterans into a higher federal income tax bracket.
One way to address this is to evaluate and perhaps adjust your tax withholding for other employment or your military retirement pay.
The IRS also has an online Tax Withholding Estimator tool that can help determine, in advance, how much tax you might owe.
However, there are some tax breaks and benefits available for military Veterans, some of which can lower your taxable income. Here are a few examples.
State and federal tax breaks for Veterans
Note: Eligibility rules and requirements vary, so not all tax benefits are available to all retired military members.
- Tax Benefits for Disabled Veterans. Disabled Veterans may be eligible for tax breaks at the federal and state levels. It's worth noting again that disability benefits you receive from the Department of Veterans Affairs (VA) are excluded from gross income and are not subject to tax. Typically, disability retirement pay, other disability compensation, and benefits received under a dependent care assistance program are also not taxable.
- Veterans Education Benefits. Veterans receiving education, training, or subsistence payments from the VA don’t have to report the payments as income on their federal tax returns.
- Special Tax Refund Considerations. Retired military service members may be eligible for a federal tax refund in special tax situations, such as an increase in disability percentage or being granted combat-related special compensation after concurrent retirement and disability.
Note: 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 as needed.
Property tax and disabled Veterans
If you're a retired military service member, it's worth checking to see if you qualify for state property tax exemptions. Generally, these exemptions are reserved for disabled Veterans, although eligibility criteria and rules vary from state to state.
Older adults 65 and older may also be eligible for property tax relief.
It's good to check the eligibility guidelines in your state, which could help reduce your property tax bill.
Do military members qualify for the earned income tax credit?
The earned income tax credit (EITC) is often overlooked by eligible Veterans and military households, as well as individuals with disabilities, those living in nontraditional homes, and households with no children.
The credit is designed for people whose earned income was under $66,819 during 2024, and it can lower the amount of taxes that you owe or result in a tax refund.
Last year, nearly 23 million eligible workers and families received about $57 billion in earned income credits, with the average EITC amount being just over $2,500.
The IRS reports that almost two million Veterans and military households receive the credit. (Several states also offer an earned income tax credit.)
States that don’t tax military retirement
Most states fully exempt military retirement income from state income tax.
- As mentioned, however, when it comes to tax treatment, some states don’t favor military income.
- And other states only offer partial tax breaks to Veterans in terms of how military retirement income is taxed.
States that still partially tax retirement income include Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, New Mexico, Oregon, Vermont, and Virginia.
The District of Columbia and California still fully tax military pensions.
Related
-
NYC Congestion Pricing: Ghost Tax or Necessary Fee?State Taxes Drivers headed to Manhattan’s downtown district will face a new $9 toll in January.
-
Tax Credit vs. Tax Deduction: What’s the Difference?Tax Breaks Your guide to tax deductions and credits, how the IRS treats them differently, and how they impact your tax bill.
-
Premium Tax Credit: Are You Eligible For This Health Insurance Tax Break?Tax Credits The tax credit can help qualifying individuals pay for coverage from the Affordable Care Act’s health insurance marketplace.
-
IRS: Here’s How to Recover Your Tax Records After a Natural DisasterTax Records Your tax documents can help you get federal relief faster, the IRS says.
-
Voters Approve New Veteran Property Tax ReliefTax Relief Thanks to the election, some Veterans will soon see expanded property tax exemptions.
-
Nevada Approves Diaper Tax Relief Amid Childcare CrisisTax Relief Nevada voters have expanded sales tax relief to diapers. But are prices still too high?
-
Earned Income Tax Credit (EITC) 2024: How Much Will You Get?Tax Credits The refundable amount for workers with or without children is slightly higher this year. Here’s what you need to know.
-
Five Cities With the Lowest Property Tax in the U.S.Property Tax Property taxes are ultra-low in these popular metro areas, but is housing affordable?
