When you retire from the military, no matter how old you are, you can start collecting retirement benefits. In other words, if you take the earliest retirement possible and retire at the age of 37, you can start collecting your military retirement benefits immediately. To make the most of your pension and avoid any state taxation of your military pension, you want to live in one of the seven states that do not impose income tax on pensions, military or otherwise. These states are Florida, Alaska, Nevada, South Dakota, Washington, Texas and Wyoming.
State Income Tax
A total of 43 states impose some sort of taxation on all types of income. While some states do not require taxes paid on Social Security income, most place some type of taxation on pensions, including those from military service. Florida is one of the few states that don't tax income.
Federal Income Tax
Federal income tax requirements can sometimes be misconstrued for state income tax, but these are two different taxes. Military pensions, like other types of income, are subject to federal income tax regardless of the state you live in. The Defense Finance and Accounting Service in Cleveland withholds a certain amount from the monthly pension and in January sends out form 1099-R showing the taxable pay and the withheld yearly amount.
Although a military retirement is a generous retirement plan, it is not a substantial amount of money, especially if you take an early retirement. Most military pensions subject to state income tax in states other than Florida have a relatively small income tax rate of approximately 3 to 4 percent. Assuming your pension is less than $20,000 per year if you took no deductions, the income tax would only amount to $600. Under normal circumstances, the tax is substantially less than this since there are regular deductions you qualify for.
Other Tax Breaks
Often a person with a military pension has other types of retirement income, including Social Security, rental property stocks, interests and retirement accounts. If this is the case, before moving to a state with no federal income like Florida, consider states with other types of retiree tax breaks as these benefits can outweigh Florida´s income tax exemption. States like Georgia, Michigan and South Carolina offer retiree tax relief in the form of Social Security exemptions, tax cuts for annuities, retirement accounts, dividends, capital gains and rents.
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