Two More States Stop Taxing Military Retired Pay

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Indiana and North Dakota join the growing list of states that don't tax retired military pay, pushing the number of states on that list to 30.

Currently, 21 U.S. states exempt military retirement pay from taxes, while 13 states plus DC have some type of exemption for military retirees.

Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not have a personal income tax. Two others, New Hampshire and Tennessee, tax only dividend and interest income.

After Indiana and North Dakota end their taxation, only the following states will fully tax retiree income:

  • California
  • Montana
  • New Mexico
  • Rhode Island
  • Utah
  • Vermont
  • Virginia

States That Exempt Military Retired Pay Growing In Number

Many state legislatures have passed laws exempting military retirees from state taxes in recent years.

While some state’s lawmakers argue for retirement pay exemption, since military retirees bring skills and earning potential to their states, others aren't so ready to give up the millions of dollars in tax revenue to bring a few more residents in. The lost revenue must be made up in other ways, leaving some states struggling to make ends meet.

However, for states seeking residents with above-average earnings, the 2.1 million military retirees are a prized group. Most are in their prime earning years, and come with skills and earning potential. Military retirees are some of the best educated, youngest, and best trained retirees that states are seeking as future residents. Locales which can lure them into becoming residents stand to gain additional income from property taxes, sales taxes, and the taxable income these retirees will earn in their second careers.

Related: State tax information for active duty members, retirees, and survivors. 

No Clear-Cut Benefit For States

The many studies on the economic benefits of cutting state taxes to lure retirees have produced conflicting results. States really can point to no clear-cut benefit for eliminating income tax on retirees. Often, the projected influx of veterans doesn't happen. Exempting military retirement from income taxes usually benefits current residents the most. Most potential residents choose their retirement location for other reasons including quality-of-life, earning potential, or family issues.

However as a current, or future, military retiree who doesn’t mind relocating it may serve you well to take the state tax climate into consideration when you consider your second career and military retirement plans.

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