With tax season only months away, military service members and veterans can ring in the new year knowing a handful of states cut their income taxes in 2023, though some of those changes won't take effect right away.
The reductions include cuts benefiting younger retirees in Maryland and Virginia; new exemptions including all active-duty and reservist pay in Indiana; and up to half of the military retirement pay of new Montanans.
Changes to states' taxes on military income signed into law by their respective governors in 2023 include:
Indiana
A new Indiana law exempts from state income tax all the military pay of active-duty service members and members of reserve units, including the state's National Guard.
The state's previous law exempted the pay of reservists on active duty but otherwise provided only up to a $5,000 deduction.
Indiana's changes taking effect for the 2023 tax year follow the state's total phasing out in 2022 of state income tax on military retirement pay.
Maryland
Described by the Maryland governor's office in a statement as "the largest military tax cut for younger veterans in a generation," the state is more than doubling its exemption of military retirement pay for veterans under age 55 as well as "spouses, or anyone receiving military pensions in Maryland" under that age.
Starting with the 2023 tax year, Maryland will exempt from state income tax the first $12,500 of the military retirement pay of those under age 55, raising the exemption from $5,000. For those 55 and older, the exemption goes up from $15,000 to $20,000.
Montana
In a tax cut directed at "resident military retirees working in the state," Montana will exempt from state income tax up to half of military retirement pay for up to five years after a retiree becomes a Montana resident or starts to receive retirement pay.
The new exemption won't be available for the 2023 taxes that retirees are gearing up to file soon but will instead go into effect for the 2024 tax year.
Virginia
Virginia created its state income tax exemption of military retirement pay in 2022 by phasing in maximums starting with the first $10,000 in military retirement that tax year and increasing by $10,000 annually until reaching $40,000 for 2025 -- but only for veterans 55 and older.
The state took away that age limit in a 2023 law: Starting with the 2024 tax year, retirees of any age will be eligible to claim the exemption.
-- To provide information about additional changes to state income taxes, please email Amanda Miller at amanda.miller@military.com.
