The 7 Most Generous States for Military Income Tax Breaks

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The 7 Most Generous States for Military Income Tax Breaks

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Financial Planning > Tax Planning

The 7 Most Generous States for Military Income Tax Breaks

By John Manganaro

Slideshow November 11, 2022 at 12:03 PM Share & Print

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Related: 12 Best Cities for Veterans: 2022

Among the many areas where the 50 states differ significantly in their tax practices is in how they treat military retirement benefits.

Currently, more than two dozen states do not tax military retirement benefit income, according to an October 2022 analysis from TurboTax. In addition, eight states have no state income tax.

It’s worth noting that In all 50 states, Veterans Affairs disability compensation and Social Security disability payments are tax-free for veterans. However, a more limited number of states exempt both active duty military pay and retired military pay from income tax calculations.

See the slideshow for a rundown of states that provide this double tax exemption for military members.

(Image: Adobe Stock)

John Manganaro

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The 7 Most Generous States for Military Income Tax Breaks

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1. Arizona
Arizona veterans scored a victory in 2021 when outgoing Gov. Doug Ducey, a Republican, signed the state’s budget reform legislation into law. Among its many provisions, the law exempted military retirement payments from state income tax.

According to the state’s Department of Revenue, the retirement-specific exemption added another incentive for military members living in the state, as beginning with the 2006 tax year, Arizona also stopped taxing active duty military pay.

According to the U.S. Department of Veterans Affairs, Arizona is home to more than 508,000 veterans.

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2. Arkansas
Arkansas is another state that exempts both active duty military pay and retired military pay from income tax calculations.

The state’s double exemption is relatively new, according to the Arkansas Department of Veterans Affairs, with the exemption for retirement pay having taken effect at the start of 2018 following the passage of a law by the 91st Arkansas General Assembly.

According to the U.S. Department of Veterans Affairs, Arkansas is home to 211,000 veterans.

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3. Illinois
As explained on the Illinois Department of Revenue website, residents in the state may subtract military pay that is included in the filer’s adjusted gross income for state income tax purposes.

Military veteran residents in the state may also subtract the amount of any federally taxed portion of benefits received from a government retirement or government disability plan, including military plans, reported on the federal Form 1040.

According to the U.S. Department of Veterans Affairs, Illinois is home to 608,000 military veterans.

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4. Michigan
According to the Michigan Department of Treasury’s website, military retirement benefits paid to retirees of the armed forces of the United States for services performed while a member are exempt from Michigan individual income tax.

As noted on the Treasury website, active duty military pay is exempt from Michigan individual income tax.

According to the U.S. Department of Veterans Affairs, Michigan is home to more than 562,000 military veterans.

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5. Minnesota
Under the state income tax framework in Minnesota, as detailed on the state’s Department of Revenue website, individuals are able to subtract military retirement pay from their Minnesota taxable income and alternative minimum taxable income.

The state also provides for a special tax credit for past military service, and a general exemption for active duty pay for work in the state. Tax filers in the state may not claim this credit if they otherwise claim a subtraction for military retirement pay, according to the Department of Revenue, meaning an individualized assessment is needed to determine the best approach for any given military retiree in the state.

According to the U.S. Department of Veterans Affairs, nearly 314,000 veterans live in Minnesota.

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6. Missouri
Under Missouri state law, as detailed in a tax form filing guide for veterans in the state, a deduction of 100% of the income received by any person as salary or compensation in any form as a member of the active duty component of the Armed Forces of the United States may be taken for state income tax purposes.

Importantly, this deduction is available only so long as the income is included in the taxpayer’s federal adjusted gross income.

According to the U.S. Department of Veterans Affairs, Missouri is home to 416,000 military veterans.

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7. Oklahoma
Under a new law in Oklahoma, military pensions are exempt from state income tax.

Previously, according to the state’s Department of Veterans Affairs, Oklahoma’s retired service members could deduct the greater of $10,000, or 75% of their retirement income, from state income tax. The change means both military pensions and active duty pay are tax exempt in the state.

According to the U.S. Department of Veterans Affairs, some 291,000 veterans currently reside in Oklahoma.

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