One of the most common questions military retirees ask is simple: "Do I pay taxes on my military retirement pay?" The short answer is yes -- military retirement pay is generally taxable at the federal level. But the full picture is much more nuanced, and understanding the details can save you thousands of dollars every year.
Between VA disability exclusions, state tax exemptions, CRDP and CRSC rules, and smart retirement planning strategies, many military retirees end up paying far less in taxes than they initially expect. Some pay nothing at all on a significant portion of their income.
This guide covers everything you need to know about military retirement pay taxes for the 2026 tax year -- from federal brackets to state-by-state rules, real dollar examples, and actionable strategies to minimize your tax burden.
Table of Contents
- 1. Federal Tax Rules for Military Retirement Pay
- 2. VA Disability Compensation Is Tax-Free
- 3. State Tax on Military Retirement: The Big Variable
- 4. Real Example: E-7, 20 Years, Married Filing Jointly
- 5. How to Reduce Your Tax Bill
- 6. Common Tax Mistakes Military Retirees Make
- 7. Tax Filing Checklist for Military Retirees
- 8. Additional Resources & Tools
1. Federal Tax Rules for Military Retirement Pay
Let's start with the basics: military retirement pay is taxable as ordinary income at the federal level. The IRS treats it the same as any other pension income. Whether you retired under the High-3 system, the legacy Final Pay system, or the Blended Retirement System (BRS), your monthly retirement check is subject to federal income tax.
How It Gets Reported
Each January, the Defense Finance and Accounting Service (DFAS) issues you an IRS Form 1099-R for the previous tax year. This form reports:
- Box 1: Gross distribution -- your total military retirement pay for the year
- Box 2a: Taxable amount -- the portion subject to federal income tax
- Box 4: Federal income tax withheld
- Box 5: Employee contributions (if any, typically for those who contributed to the military retirement fund before 1957)
- Box 7: Distribution code (typically code "7" for normal distribution)
Pro tip: You can access your 1099-R electronically through your myPay account as early as mid-December for the current tax year. Paper copies are mailed by January 31.
2026 Federal Income Tax Brackets
Your military retirement pay is added to all your other taxable income (civilian job, TSP withdrawals, Social Security, investments, etc.) and taxed according to the standard federal income tax brackets. Here are the 2026 brackets:
| Tax Rate | Single Filers | Married Filing Jointly |
|---|---|---|
| 10% | $0 - $11,925 | $0 - $23,850 |
| 12% | $11,926 - $48,475 | $23,851 - $96,950 |
| 22% | $48,476 - $103,350 | $96,951 - $206,700 |
| 24% | $103,351 - $197,300 | $206,701 - $394,600 |
| 32% | $197,301 - $250,525 | $394,601 - $501,050 |
| 35% | $250,526 - $626,350 | $501,051 - $751,600 |
| 37% | Over $626,350 | Over $751,600 |
Remember: These are marginal tax brackets, not flat rates. If your taxable income is $50,000 as a single filer, you don't pay 22% on all of it. You pay 10% on the first $11,925, 12% on the next chunk up to $48,475, and 22% only on the amount above $48,475. Your effective tax rate will be much lower than your marginal rate.
Key Point: Retirement Pay Is Not Your Only Income
Many military retirees work a second career after leaving the service. If you're earning a civilian salary on top of your military retirement pay, your combined income determines which tax bracket you fall into. For example, an E-7 retiree earning $33,600/year in military retirement plus $55,000 from a civilian job has a combined gross income of $88,600 before deductions.
This is why tax planning matters so much -- the strategies we'll cover later in this guide can make a real difference in your bottom line.
2. VA Disability Compensation Is Tax-Free
Here's the single most important tax fact for military retirees with service-connected disabilities: VA disability compensation is 100% tax-free. This applies at both the federal and state level, in all 50 states, no exceptions.
VA disability payments are completely exempt from federal income tax, state income tax, and are not even reported on your tax return as income. This is codified in 38 U.S.C. 5301.
Why Maximizing Your VA Rating Matters Financially
Because VA disability is tax-free while military retirement pay is taxable, every dollar that shifts from retirement pay to VA disability compensation saves you money on taxes. This is not about gaming the system -- it's about making sure you receive all the benefits you're entitled to for your service-connected conditions.
Consider this: if you're in the 22% federal tax bracket and living in a state with a 5% income tax, a $500/month increase in VA disability (with a corresponding reduction in taxable retirement pay) saves you roughly $135/month in taxes, or about $1,620 per year.
CRDP vs. CRSC: The Tax Implications
If you have both military retirement pay and a VA disability rating of 50% or higher, you likely qualify for concurrent receipt through either CRDP or CRSC. The tax treatment of these two programs is very different:
- CRDP (Concurrent Retirement and Disability Pay): Restores your full retirement pay. The restored amount is taxable as ordinary retirement income. CRDP is automatic for retirees with 20+ years and a 50%+ VA rating.
- CRSC (Combat-Related Special Compensation): Replaces the VA offset with a special payment that is 100% tax-free, just like VA disability. CRSC requires a separate application and is available for disabilities directly related to combat, hazardous duty, instrumentality of war, or armed conflict conditions.
This is a critical distinction. If you qualify for CRSC, the tax-free nature of those payments could make CRSC the better deal even when the gross payment amount is lower than CRDP. Always compare both programs on an after-tax basis. Read our complete CRDP vs CRSC guide for detailed calculations.
Example: E-7 with 20 Years and 70% VA Disability
Let's look at a concrete example to illustrate why VA disability matters so much for your tax picture:
| Income Component | Monthly | Annual | Taxable? |
|---|---|---|---|
| Gross Retirement Pay (High-3) | $2,800 | $33,600 | Yes (federal) |
| VA Disability (70%, no dependents) | $1,716 | $20,592 | No -- tax-free |
| VA Offset (waiver from retirement pay) | -$1,716 | -$20,592 | N/A |
| Net Retirement Pay (before CRDP/CRSC) | $1,084 | $13,008 | Yes |
| Total Monthly Income | $2,800 | $33,600 | Only $13,008 taxable |
Without CRDP or CRSC, this E-7's taxable retirement income is only $13,008/year, not the full $33,600. That's a massive difference. With CRDP, the full $33,600 becomes taxable retirement income (but you also get the full $20,592 in tax-free VA disability on top). With CRSC, the $20,592 combat-related portion stays tax-free.
Bottom line: If this E-7 retiree has no other income and files as married filing jointly, the $13,008 in net taxable retirement income falls well below the standard deduction of approximately $30,050 -- meaning they could owe zero federal income tax on their military retirement pay alone.
3. State Tax on Military Retirement: The Big Variable
Federal taxes are the same no matter where you live. But state taxes on military retirement vary wildly -- and this is where your choice of residence can make or break your budget. The good news? The trend has been overwhelmingly in favor of military retirees, with state after state eliminating taxes on military retirement pay in recent years.
The Current Landscape in 2026
As of 2026, 37 states either have no income tax or fully exempt military retirement pay from state taxation. That leaves only about 13 states that tax military retirement in some form -- and several of those offer partial exemptions.
States with No Income Tax (9 States)
These states don't tax any income, so your military retirement pay is automatically tax-free at the state level:
- Alaska (AK)
- Florida (FL)
- Nevada (NV)
- New Hampshire (NH) -- no tax on earned income; taxes only interest and dividends (being phased out)
- South Dakota (SD)
- Tennessee (TN)
- Texas (TX)
- Washington (WA)
- Wyoming (WY)
States That Fully Exempt Military Retirement Pay (28+ States)
These states have an income tax but have passed laws specifically exempting military retirement pay from state taxation. This list has grown significantly in recent years:
- Alabama (AL)
- Arizona (AZ)
- Arkansas (AR)
- Connecticut (CT)
- Hawaii (HI)
- Illinois (IL)
- Indiana (IN)
- Iowa (IA)
- Kansas (KS)
- Kentucky (KY)
- Louisiana (LA)
- Maine (ME)
- Massachusetts (MA)
- Michigan (MI)
- Minnesota (MN)
- Mississippi (MS)
- Missouri (MO)
- Nebraska (NE)
- New Jersey (NJ)
- New Mexico (NM)
- New York (NY)
- North Carolina (NC)
- North Dakota (ND)
- Ohio (OH)
- Oklahoma (OK)
- Oregon (OR)
- Pennsylvania (PA)
- Rhode Island (RI)
- South Carolina (SC)
- West Virginia (WV)
- Wisconsin (WI)
States That Still Tax Military Retirement (Partially or Fully)
The remaining states either fully tax military retirement pay or offer only limited exemptions. These rules change frequently, so always verify with your state's tax authority:
| State | Tax Treatment | Notes |
|---|---|---|
| California (CA) | Taxed (partial exemption available) | Exemption up to ~$20,000 for qualifying retirees; rates up to 13.3% |
| Colorado (CO) | Partially exempt | Exemption up to $24,000 for age 55-64; fully exempt at 65+ |
| Delaware (DE) | Partially exempt | Up to $12,500 pension exclusion for those under 60; $12,500 for 60+ |
| Georgia (GA) | Partially exempt | Up to $35,000 exclusion for those 62-64; $65,000 for 65+ |
| Idaho (ID) | Taxed | No specific military exemption; general pension deductions may apply |
| Maryland (MD) | Partially exempt | First $12,500 exempt for retirees under 55 with 20+ years |
| Montana (MT) | Partially exempt | Partial pension exclusion available based on income |
| Utah (UT) | Taxed (credit available) | Tax credit for retirement income; phases out at higher incomes |
| Vermont (VT) | Partially exempt | Partial exemption for military retirement income |
| Virginia (VA) | Partially exempt | Age deduction: up to $12,000 for age 65+; under consideration for full exemption |
This landscape is changing fast. In just the last five years, states like North Carolina, Indiana, Nebraska, Rhode Island, and others have moved from taxing to fully exempting military retirement pay. If your state currently taxes military retirement, check your state legislature -- there may be an exemption bill in progress. For the complete state-by-state breakdown, see our interactive states guide.
4. Real Example: E-7, 20 Years, Married Filing Jointly
Let's walk through a detailed, realistic tax scenario so you can see exactly how these rules work in practice.
The Setup
- Rank at retirement: E-7 (Sergeant First Class / Chief Petty Officer)
- Years of service: 20 years
- Retirement system: High-3
- Monthly retired pay: ~$2,800/month ($33,600/year)
- VA disability rating: 70%
- VA disability compensation: $1,716.28/month ($20,595/year) -- veteran with spouse, no children
- Filing status: Married filing jointly
- Spouse income: $0 (for simplicity)
- No other income (no civilian job, no TSP withdrawals)
Step 1: Determine Taxable Income
With CRDP (which is automatic at 50%+ VA rating with 20 years of service), this retiree receives the full gross retirement pay of $33,600 per year, plus the tax-free VA disability of $20,595 per year.
For federal tax purposes:
- Gross income: $33,600 (military retirement -- the VA disability is not reported)
- Standard deduction for MFJ (2026 estimate): ~$30,050
- Taxable income: $33,600 - $30,050 = $3,550
Step 2: Calculate Federal Tax
With only $3,550 in taxable income (MFJ), this retiree falls entirely in the 10% bracket:
- Federal tax owed: $3,550 x 10% = $355
That's right -- just $355 in federal income tax for the entire year. This E-7 retiree receives $54,195 total annually ($33,600 retirement + $20,595 VA disability), but only owes $355 in federal tax. That's an effective federal tax rate of 0.65%.
If this retiree chose CRSC instead (and all disabilities were combat-related), the $20,595 CRSC portion would be tax-free too. In that case, only the net retirement pay of ~$13,005 would be taxable, which is well below the standard deduction -- meaning $0 in federal tax.
Step 3: Compare State Taxes -- Texas vs. California
Now let's see how the choice of state dramatically changes the picture. We'll compare Texas (no income tax) with California (taxes military retirement).
| Tax Category | Texas (TX) | California (CA) |
|---|---|---|
| Military Retirement Pay | $33,600/yr | $33,600/yr |
| VA Disability (tax-free) | $20,595/yr | $20,595/yr |
| State Tax on Retirement Pay | $0 | ~$600 - $1,000* |
| Federal Tax (estimated) | $355 | $355 |
| Total Tax Burden | $355/yr | $955 - $1,355/yr |
| Annual Savings in TX | $600 - $1,000 per year | |
*California estimate accounts for the state standard deduction, partial military exemption, and California's progressive tax rates. Actual amount varies by individual circumstances.
In this specific example with modest income, the state tax difference is $600 to $1,000 per year. But for higher-ranking retirees with more retirement income, the gap widens dramatically.
What If This Retiree Also Has a Civilian Job?
Now let's add a $55,000 civilian salary to the picture. The numbers change significantly:
| Tax Category | Texas (TX) | California (CA) |
|---|---|---|
| Total Gross Income | $88,600 | $88,600 |
| Federal Taxable Income (after std. deduction) | ~$58,550 | ~$58,550 |
| Federal Tax (MFJ) | ~$6,560 | ~$6,560 |
| State Income Tax | $0 | ~$3,100 - $3,800 |
| Total Tax Burden | ~$6,560 | ~$9,660 - $10,360 |
| Annual Savings in TX | ~$3,100 - $3,800 per year | |
Over a 20-year retirement, that $3,100-$3,800 annual difference adds up to $62,000 to $76,000 in cumulative state tax savings -- just from choosing the right state.
Use our calculator to run these numbers for your specific situation. Enter your rank, years of service, VA rating, and state to see your personalized after-tax income. Try it now →
5. How to Reduce Your Tax Bill
Beyond choosing a tax-friendly state, there are several proven strategies to minimize the taxes you pay on military retirement income.
Strategy 1: Roth TSP vs. Traditional TSP
If you're still serving or making TSP contributions, this is one of the most impactful long-term decisions you'll make:
- Traditional TSP contributions reduce your taxable income now, but withdrawals in retirement are fully taxable as ordinary income.
- Roth TSP contributions are made with after-tax dollars, but all withdrawals in retirement (contributions AND earnings) are 100% tax-free.
If you expect to be in a similar or higher tax bracket in retirement (especially with a second career), Roth TSP contributions can save you a substantial amount over the long run. And if you're deployed to a combat zone, the tax savings on Roth contributions are even more powerful -- see our TSP Roth Conversion & CZTE guide.
Power move: If you're in a combat zone tax exclusion (CZTE) area, your income is already tax-free. Making Roth TSP contributions during deployment means you pay zero tax going in AND zero tax coming out. It's the only way to get truly double-tax-free retirement savings.
Strategy 2: Maximize the Standard Deduction
For 2026, the standard deduction is estimated at approximately:
- Single: ~$15,050
- Married Filing Jointly: ~$30,050
- Head of Household: ~$22,550
- Additional deduction for age 65+: ~$1,600 (single) or ~$1,300 per spouse (MFJ)
If your total taxable income (after the VA disability exclusion) is below the standard deduction, you could owe zero federal income tax. This is realistic for many military retirees whose only taxable income is their net retirement pay.
Strategy 3: Itemized Deductions
If your deductible expenses exceed the standard deduction, itemizing can reduce your taxable income further. Common deductions for military retirees include:
- Mortgage interest on your primary residence
- State and local taxes (SALT) up to $10,000
- Charitable contributions
- Medical expenses exceeding 7.5% of AGI (relevant for retirees with significant out-of-pocket healthcare costs beyond TRICARE)
Strategy 4: Qualified Charitable Distributions (QCDs)
Once you reach age 70 and a half, you can make Qualified Charitable Distributions (QCDs) directly from your traditional TSP or IRA to a qualified charity. The distribution counts toward your Required Minimum Distribution (RMD) but is excluded from your taxable income -- up to $105,000 per year in 2026.
This is a powerful tool for retirees who are charitably inclined and want to avoid paying taxes on required distributions.
Strategy 5: Time Your Retirement Wisely
If you have flexibility in choosing your retirement date, consider the tax implications of which calendar year you retire in:
- Retiring late in the year means you'll have both active duty income and retirement pay in the same tax year, potentially pushing you into a higher bracket.
- Retiring early in the year (e.g., January or February) means your active-duty income for that year is minimal, and your retirement pay starts in a low-income year.
- Consider using terminal leave strategically to shift income between tax years.
Strategy 6: Claim the SBP Tax Deduction
If you're enrolled in the Survivor Benefit Plan (SBP), your premiums are tax-deductible. SBP premiums of 6.5% of your base retired pay can be deducted from your gross retirement income, reducing your taxable amount. This deduction is automatically reflected on your 1099-R from DFAS -- but it's worth verifying.
Learn more about SBP: Check out our SBP guide to decide whether the Survivor Benefit Plan is worth the cost for your family situation.
6. Common Tax Mistakes Military Retirees Make
After helping thousands of military retirees understand their finances, these are the mistakes we see most often. Avoid them and you'll keep more of your hard-earned money.
Mistake #1: Not Updating Your DFAS Tax Withholding
When you first retire, DFAS applies default federal tax withholding to your retirement pay. Many retirees never update it, which can lead to either:
- Over-withholding: You get a big refund every year, which means you've been giving the government an interest-free loan.
- Under-withholding: You owe a large tax bill in April, possibly with penalties.
Action item: Review and update your withholding by submitting a new IRS Form W-4P through your myPay account or by mailing DD Form 2866 (Retiree Change of Address/State Tax Withholding Request) to DFAS. Do this whenever your financial situation changes -- new spouse, new job, VA rating change, or move to a different state.
Mistake #2: Forgetting to Claim VA Disability on Time
Some retirees delay filing their VA disability claims, not realizing the tax impact. Every month you delay is a month where money that could be tax-free VA compensation is instead taxable retirement pay. File your VA claim before or immediately upon retirement -- you can even file up to 180 days before your separation date using the Benefits Delivery at Discharge (BDD) program.
Mistake #3: Not Considering State Tax When Choosing Where to Retire
We see retirees who carefully compare BAH rates and cost of living between duty stations but then pick a retirement state without ever checking its tax policy on military retirement pay. As we showed in the example above, this decision can cost tens of thousands of dollars over the course of your retirement.
Before you sign a lease or buy a home, check our best states for military retirees guide and the state-by-state tax comparison tool.
Mistake #4: Double-Counting CRDP/CRSC Income
CRDP and CRSC can be confusing on paper, and some retirees (or their tax preparers) accidentally report these amounts incorrectly. Here's what to remember:
- CRDP is included in your 1099-R gross distribution -- it is taxable and should be reported.
- CRSC is not included on your 1099-R because it is tax-free. Do not add it to your taxable income.
- VA disability compensation is never reported on your tax return. If your tax preparer asks for your VA payment amount to add to income, find a new tax preparer.
Mistake #5: Missing the SBP Tax Deduction
Your SBP premiums reduce your taxable retirement income. DFAS should reflect this on your 1099-R, but some retirees using tax software manually enter their gross retired pay without accounting for the SBP deduction. Always use the amounts shown on your official 1099-R, not the amounts from your monthly pay statement before SBP is accounted for.
Mistake #6: Ignoring State Tax Changes
As we mentioned, state tax laws on military retirement are changing rapidly. If you retired five years ago in a state that taxed your retirement pay, check again -- your state may have passed an exemption since then. You could be eligible for a refund of taxes previously paid, depending on when the law took effect.
7. Tax Filing Checklist for Military Retirees
Before you sit down to file your taxes (or hand everything to a tax preparer), make sure you have these documents organized and ready.
Your Military Retiree Tax Filing Checklist
- Form 1099-R from DFAS -- Shows your military retirement pay and federal tax withheld. Available on myPay by late January.
- VA Benefit Verification Letter -- While VA disability isn't reported on your tax return, keep this letter in your records to document your tax-free income. Obtain it from eBenefits or VA.gov.
- State tax forms -- If you live in a state with income tax, you'll need your state's specific tax forms. Check if your state requires a separate military exemption form.
- TSP Form 1099-R -- If you took any TSP distributions during the year, you'll receive a separate 1099-R from the Thrift Savings Plan.
- SBP premium records -- Your SBP premiums should be reflected on your DFAS 1099-R, but keep your pay statements as backup to verify the deduction was applied correctly.
- W-2 from civilian employer -- If you worked a second career job during the year.
- Form 1099-SSA -- If you received Social Security benefits (for retirees over 62).
- Records of estimated tax payments -- If you made quarterly estimated payments during the year.
- DD-214 -- While not needed annually, keep this accessible. Some states require proof of veteran status for their military retirement exemptions.
- CRSC/CRDP documentation -- Keep your DFAS pay statements showing CRDP or CRSC amounts for reference.
Tip: If you use a tax preparer, make sure they have experience with military retirement pay. Not all tax professionals understand CRDP, CRSC, the VA disability offset, or state military exemptions. The IRS Volunteer Income Tax Assistance (VITA) program at many military installations offers free tax preparation for military families, and these preparers are specifically trained on military tax issues.
8. Additional Resources & Tools
Now that you understand how military retirement taxes work, put this knowledge into action with these resources:
Calculate Your After-Tax Pay
Our free Military Retirement Calculator lets you enter your rank, years of service, VA disability rating, and state of residence to see your estimated after-tax retirement income. It accounts for federal taxes, state taxes, and VA disability offsets.
Find the Right State
Use our interactive state-by-state guide to compare tax treatment across all 50 states. Or read our 10 Best States for Military Retirees in 2026 for a curated ranking based on taxes, cost of living, VA access, and more.
Understand Your Benefits
- CRDP vs CRSC: Complete Guide 2026 -- Detailed comparison with real calculations and tax implications
- How to Calculate Military Retirement Pay in 2026 -- Step-by-step breakdown of the High-3, Final Pay, and BRS systems
- SBP: Is the Survivor Benefit Plan Worth It? -- Analysis of costs, benefits, and tax deductions
- TSP Roth Conversions & CZTE Guide -- Maximize your tax-free retirement savings
- 2026 Military Retirement & VA Disability Rates -- Current pay charts with COLA adjustments
Key Takeaways
Here's the bottom line on military retirement taxes in 2026:
- Military retirement pay is taxable at the federal level as ordinary income, reported on Form 1099-R.
- VA disability compensation is 100% tax-free -- federally and in all 50 states. Maximize your rating.
- 37 states don't tax military retirement pay at all (9 no-income-tax states + 28+ with full exemptions).
- CRSC is tax-free; CRDP is taxable. Always compare on an after-tax basis.
- The standard deduction alone can eliminate federal tax for retirees with modest taxable income.
- Your choice of state can save $2,000 - $6,000+ per year depending on your income level.
- Roth TSP, QCDs, and strategic timing are powerful tools for long-term tax minimization.
This article provides general information about taxes on military retirement pay and is current as of February 2026. Tax laws change frequently. For advice specific to your situation, consult a qualified tax professional or financial advisor. For the most current state-specific information, verify with your state's department of revenue.