How states tax military retired pay in 2026

Twenty-eight states exempt all military retired pay from income tax in 2026. We calculate how the pay changes federal and state income tax for two couples in every state.

Contents

A retiree with a second career

A retired couple

Conclusion

How we calculated the couples' taxes

Appendix

Twenty-eight states exempt all military retired pay from income tax in 2026, including Utah, which offsets its tax on the pay with a credit. Another 13 exempt all, part or none of it, depending on the amount of pay, the retiree's age, income, earnings and residency, and how long and when the retiree served. The District of Columbia taxes all of it, and nine states levy no broad income tax.

Table 1: How states treat military retired pay in 2026

Treatment	States
Exempt all of it (28)	Alabama, Arizona, Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Utah, West Virginia and Wisconsin
Exempt all, part or none of it, depending on the retiree (13)	California, Colorado, Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, New Mexico, North Carolina, Oregon, Vermont and Virginia
Exempt none of it	District of Columbia
Levy no broad income tax (9)	Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming

A retiree with a second career#

Take a married couple in which one spouse is 45, draws $30,000 of military retired pay and earns $60,000 in a civilian job. The couple owes more state income tax because of the pay in nine states and DC, from $60 in Maine to $2,310 in Oregon. The pay also adds $3,600 to the couple's federal income tax. After federal and state income tax, the couple keeps $24,090 to $26,580 of the $30,000, depending on the state. The retiree served 20 years, from 2001 through 2020, and the other spouse has no income.

Source: PolicyEngine-US household calculations for 2026; github.com/PolicyEngine/veterans-day-2026.

Oregon and DC tax all of this couple's pay, so the couple owes $2,310 more in Oregon and $1,900 more in DC. Delaware, Maryland, Montana, Colorado and California each exempt $12,500 to $20,000 of it, and the couple owes $1,087 more in Delaware, $831 in Maryland before county income tax, $705 in Montana, $660 in Colorado and $278 in California. The other seven of the 13 states exempt all $30,000 of this couple's pay.¹ For example, Georgia exempts up to $35,000 for a retiree under 62 who earns more than $17,500 in Georgia.

Utah, South Carolina and Maine exempt the pay, but the couple still owes more there, because each counts the pay as income when it sets a credit or deduction:

Utah offsets its tax on the pay with a credit (Utah Code § 59-10-1043), but it shrinks its taxpayer tax credit by 1.3% of income above a base amount (2025 TC-40 instructions, p. 8). The pay adds $30,000 to that income, so the couple loses $390 of that credit.
South Carolina shrinks its $30,000 Income Adjusted Deduction for married couples whose federal adjusted gross income (AGI) exceeds $80,000 (Act 110 of 2026, section 3). The pay lifts the couple's federal AGI to $90,000, and the couple owes $142 more.
Maine counts the pay as income for its sales tax fairness credit (36 M.R.S. § 5213-A), and the couple loses a $60 credit.

In Alabama and Missouri, the couple owes less state income tax with the pay than without it: $180 less in Alabama and $25 less in Missouri. Both states exempt the pay and let filers deduct federal income tax, which rises by $3,600 with the pay. Alabama lets filers deduct all of it (2025 Form 40 booklet, p. 8), and Missouri lets this couple deduct 15% of it (RSMo 143.171).

A retired couple#

A retired couple aged 67 and 65, living on $45,000 of military retired pay and $30,000 of Social Security, owes more state income tax because of the pay in ten states, up to $440 in Hawaii. After federal and state income tax, the couple keeps $42,850 to $43,290 of the $45,000, depending on the state. The retiree served 20 years, from 1977 through 1996.

With the pay, the couple must count $19,600 of their Social Security as taxable income, their federal AGI rises from $0 to $64,600, and their federal income tax rises from $0 to $1,710.

Montana exempts none of this couple's pay, because it exempts no more than the Montana earnings on a return and the couple has none. Montana also follows the federal rules for Social Security, so it taxes the $19,600 that the pay makes taxable, and the couple owes $258 more there. Delaware taxes all but $12,500 of the pay, and the couple owes $353 more. DC taxes all of the pay, but from 2026 it lets filers take the federal $6,000 deduction for each spouse 65 or older (Fiscal Year 2027 Budget Support Act of 2026, section 7112). The couple's deductions in DC then exceed the $45,000, and the couple owes no DC income tax. California, Colorado, Idaho, Maryland, New Mexico, Oregon and Virginia also tax part of this couple's pay, but after their deductions, exemptions and credits, the couple owes those states no income tax on it.

In seven states, the couple loses a credit:

Table 2: Credits the retired couple loses because of the pay

State	Credit the couple loses	Amount	Law
Hawaii	Food/excise tax credit, for married couples with federal AGI under $60,000	$440	2025 Form N-311
Vermont	Veteran tax credit, for veterans with federal AGI under $30,000	$250	32 V.S.A. § 5830g
Maine	Sales tax fairness credit, which Maine reduces as income rises above a threshold	$220	36 M.R.S. § 5213-A
New Mexico	Low income comprehensive tax rebate, for households with modified gross income up to $36,000	$152	2025 PIT-RC instructions
Indiana	Unified tax credit for the elderly, for filers 65 or older with federal AGI under $10,000	$140	2025 IT-40 booklet, p. 30
Oklahoma	Sales tax relief credit, for filers 65 or older with household income up to $50,000	$80	2025 Form 538-S
Arizona	Credit for increased excise taxes, for married couples with federal AGI of $25,000 or less	$50	A.R.S. § 43-1072.01

Idaho charges $10, its permanent building fund tax, on each return it requires (Idaho Code § 63-3082), and with the pay, this couple has to file.

Conclusion#

A married couple owes more state income tax in nine states and DC, up to $2,310 in Oregon, when one spouse, age 45, draws $30,000 of military retired pay and earns $60,000. After federal and state income tax, that couple keeps $24,090 to $26,580 of the pay. A retired couple with $45,000 of the pay and $30,000 of Social Security owes more state income tax in ten states, up to $440 in Hawaii. After federal and state income tax, that couple keeps $42,850 to $43,290 of the pay. In seven of the ten states, the couple loses a credit, and Idaho charges $10 on each return it requires, so only Delaware and Montana collect tax on the pay itself.

Use PolicyEngine to calculate your own taxes and benefits.

How we calculated the couples' taxes#

We calculated each couple's 2026 federal and state income tax in every state twice with PolicyEngine-US, once with the military retired pay and once without it. Both couples file jointly, claim no dependents and live in the state all year. Neither retiree has a service-connected disability. PolicyEngine-US assumes each Alaska resident receives a Permanent Fund Dividend and counts it as income. With the dividend, the pay makes $21,300 of the retired couple's Social Security taxable in Alaska and raises their federal income tax by $2,080 rather than $1,710. In the retired couple, the retiree served entirely before 1998, and 177 of those 240 months fall before October 1991. In Montana, we assume the retiree meets the exemption's residency test and that 2026 falls within its five consecutive years. We count state credits, including refundable ones, in state income tax and leave out local income taxes, such as those Maryland's counties levy. Most states have yet to publish their 2026 forms, so we estimate some inflation-adjusted amounts, and the final amounts can differ by a few dollars. We ran PolicyEngine-US with updates we haven't yet released, such as DC's 2026 deductions, and until we release them, the PolicyEngine web calculator can show different amounts.

PolicyEngine's microdata don't record veteran status or military retired pay, so we don't estimate how many retirees each state's rules reach. We publish the code and full results, including a wider grid of pay and wages for both ages, at github.com/PolicyEngine/veterans-day-2026.

PolicyEngine also models rules in benefit programs and state income taxes that depend on military service or veteran status, including the four in Table 4 of the appendix.

Appendix#

Table 3: Military retired pay the 13 states and DC exempt in 2026

State	Military retired pay the state exempts in 2026	Law
California	Up to $20,000 per return, for filers with federal AGI up to $125,000, or $250,000 on a joint return	R&TC § 17132.9
Colorado	Up to $15,000 for a retiree under 55. From 55, Colorado counts the pay toward its retirement income subtraction: $20,000 at 55 to 64 and $24,000 at 65 or older	C.R.S. 39-22-104(4)(y) and (4)(f)
Delaware	Up to $12,500 for a retiree under 60. From 60, Delaware exempts up to $12,500 of the pay, other pensions and retirement income combined	30 Del. C. § 1106(b)(3)
Georgia	Up to $17,500 for a retiree under 62, plus $17,500 more for one with over $17,500 of Georgia earnings. From 62, Georgia counts the pay toward its retirement income exclusion: $35,000 at 62 to 64 and $65,000 at 65 or older	O.C.G.A. § 48-7-27(a)(5.1) and (a)(5); 2025 IT-511 booklet, p. 21
Idaho	Up to the maximum Social Security benefit, half again as much on a joint return, less the filers' Social Security, for a retiree aged 62 or older, with a disability, or with earnings high enough to require a federal return	Idaho Code § 63-3022A
Kentucky	The share from service before 1998. Kentucky counts the rest toward its $31,110 pension exclusion, which also covers other pensions and retirement income	KRS 141.019(1)(g); 2025 Schedule P
Maryland	Up to $12,500 for a retiree under 55 and $20,000 from 55. From 65, Maryland counts the rest toward its pension exclusion	Tax–General § 10-207(q)
Montana	Half of the pay, up to the Montana earnings on the return, for five years, for a retiree who meets a residency test	MCA 15-30-2120(3)(n), (8) and (9)
New Mexico	Up to $30,000	2024 House Bill 252, section 32 (NMSA § 7-2-5.13)
North Carolina	All of it, for a retiree who served at least 20 years, retired for medical reasons, or had five years of service by August 12, 1989	G.S. 105-153.5(b)(5) and (b)(5a)
Oregon	The share from service before October 1991	ORS 316.680(1)(e)
Vermont	All of it for filers with federal AGI up to $125,000, and a share that falls to zero at $175,000	32 V.S.A. § 5830e(d)
Virginia	Up to $40,000	Va. Code § 58.1-322.02(18)
District of Columbia	None	D.C. Code § 47-1803.02(a)(2)(N)

Table 4: Other rules for veterans that PolicyEngine models

Program	Rule	Law
SNAP	Congress exempted veterans from SNAP's time limit for adults without dependents in 2023, then ended the exemption in July 2025.	P.L. 118-5, sec. 311; P.L. 119-21, sec. 10102
Medicaid	States must apply work requirements to adults in the Medicaid expansion by January 1, 2027, or by the end of 2028 if the Secretary of Health and Human Services grants a state more time. They must exempt veterans with a disability the Department of Veterans Affairs (VA) rates as total.	P.L. 119-21, sec. 71119; 42 CFR 435.554(c)(4)
Kansas income tax	Kansas gives an extra $2,320 exemption to each veteran with an honorable discharge who receives VA disability compensation at the 100% rate for a permanent service-connected disability.	K.S.A. 79-32,121b(b)(2)
Michigan income tax	Michigan gives an extra $500 exemption to each veteran with an honorable or general discharge and a service-connected disability, at any rating.	MCL 206.30(3)(b) and (7); 2025 MI-1040 instructions, p. 10