Is Military Retirement Pay Taxable? Federal Rules and State-by-State Breakdown

Federal treatment

How is military retirement pay taxed by the IRS?

The IRS treats military retired pay exactly like any other pension. The Defense Finance and Accounting Service (DFAS) sends you a Form 1099-R each January showing the gross amount paid during the prior tax year. You report that amount on your federal return, and it is taxed at your marginal income-tax rate alongside any other income you earn.

Withholding happens automatically. When you first set up your retired pay, DFAS applies a default withholding rate based on the W-4P information you provide. If you have not updated your W-4P in several years, your withholding may not reflect current brackets -- resulting in either a large refund (money you could have used all year) or an unexpected balance due.

What counts as military retirement pay?

For tax purposes, the term covers several distinct payment streams, all reported on 1099-R:

• Non-disability retired pay -- the pension based on years of service and pay grade (sometimes called "longevity" retirement).
• Temporary Early Retirement Authority (TERA) pay for members who retired with 15-19 years of service.
• Concurrent Retirement and Disability Pay (CRDP) -- the restored retired-pay portion for veterans rated 50 percent or higher disabled by the VA. The CRDP amount itself is taxable because it replaces retired pay, even though the underlying VA disability rating triggered it.
• Survivor Benefit Plan (SBP) annuities paid to a surviving spouse or child -- also taxable as ordinary income to the recipient.

The critical exception is VA disability compensation, which is completely tax-free. If you receive both retired pay and VA disability, the VA portion is excluded from your 1099-R. For a full breakdown of how these interact, see our VA disability tax guide.

Which states tax military retirement pay?

State tax treatment of military pensions has shifted dramatically over the past decade. Dozens of states have enacted full exemptions, and more join each year. As of 2026, military retirees fall into one of four categories depending on where they live:

Important: State rules change annually. Georgia, for instance, increased its exemption to $65,000 for tax year 2026. Vermont added a full exemption (with an AGI cap of $125,000) effective 2025. Before making a residency decision, verify the current rule directly with your state's Department of Revenue. A list that was accurate six months ago may already be outdated.

How to adjust withholding on your military pension

If you are over-withheld or under-withheld, you have two options:

You can also choose to have no federal tax withheld and instead make estimated quarterly payments using IRS Form 1040-ES. This makes sense if your pension is small relative to other income sources and you already make quarterly payments.

State withholding through DFAS

DFAS can withhold state income tax for most states that levy one. You set or change this through myPay alongside your federal elections. If you live in a state that fully exempts military retirement pay, set your state withholding to zero -- otherwise DFAS will withhold based on the state's default table, and you will need to file a return just to get your money back.

What about the Blended Retirement System (BRS)?

Service members who entered after January 1, 2018 -- or who opted in -- are under the Blended Retirement System. Their pension portion is smaller (2.0 percent per year instead of 2.5 percent), but they also receive TSP matching contributions. The tax treatment of the pension portion is identical: fully taxable as ordinary income, reported on 1099-R. TSP withdrawals in retirement have their own tax rules (traditional withdrawals are taxable; Roth qualified withdrawals are tax-free).

Does the SCRA protect military retirees from state tax?

The Servicemembers Civil Relief Act (SCRA) protects active-duty pay from being taxed by a state other than the member's legal domicile. It does not apply to retirement pay. Once you retire, you are taxed by the state where you actually reside -- which is why the choice of domicile after separation matters. If you plan to retire in a state that still taxes military pensions, factor that cost into your budget before you move.

Common mistakes that raise your tax bill

1. Assuming VA disability eliminates all tax. A VA rating replaces a portion of your retired pay with tax-free disability compensation, but the remaining retired-pay portion is still taxable. Only a 100-percent VA rating fully offsets the pension for tax purposes, and even then, CRDP may restore taxable pay (see the CRDP/CRSC distinction).
2. Ignoring SBP tax implications. SBP premiums you pay as a retiree are not deductible on your federal return. The annuity your survivor receives is taxable. Many families are surprised by this.
3. Stale state withholding after a move. If you move from a taxing state to a no-tax state but forget to update DFAS, you will overpay all year and wait until filing season for a refund.
4. Not coordinating with other retirement income. Military retired pay combined with Social Security, TSP withdrawals, and part-time work can push you into a higher effective tax rate than you expect. Model your full income picture each year.

Strategies that legally reduce your federal tax

You cannot avoid federal tax on military retirement pay, but you can reduce the bite:

• Maximize tax-advantaged accounts. If you work after retiring, contribute to a 401(k), Traditional IRA, or HSA to offset taxable income. The retirement income tax calculator can help you model different scenarios.
• Harvest the standard deduction. For 2026, the standard deduction for a married-filing-jointly couple is significant. If your total income is modest, a large share of your pension may fall below the taxable threshold.
• Time Roth conversions. Converting traditional TSP or IRA money to Roth in low-income years before Social Security starts can save tax over your lifetime.
• Charitable giving from an IRA. At age 70-1/2 or older, a Qualified Charitable Distribution from an IRA satisfies your Required Minimum Distribution without increasing taxable income.