Yes, a military pension is taxable at the federal level. The IRS treats monthly retired pay as ordinary income, so federal rates from 10 percent to 37 percent apply based on your total income and filing status.1Internal Revenue Service. Federal Income Tax Rates and Brackets Two big carve-outs change that answer for many retirees: disability-related pay can be excluded from income, and state tax treatment varies so widely that roughly half of all states collect nothing on military pensions at all.
Federal Tax on Regular Retired Pay
Federal law defines gross income to include pensions from any source, and military retirement pay falls squarely inside that definition.2Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined If you retired after 20 or more years of service, active duty or reserve, the full gross amount of your retired pay is taxable at ordinary rates.
A few pre-tax deductions shrink the taxable figure before the government calculates what you owe. The most common is the Survivor Benefit Plan premium, which reduces your taxable retired pay dollar for dollar. Federal brackets apply progressively, so only the income within each bracket is taxed at that bracket’s rate.
Each January, the Defense Finance and Accounting Service issues Form 1099-R showing your total retired pay, the taxable portion, and any federal or state withholding. Electronic copies typically post to myPay in mid-to-late December, ahead of the paper version.3Defense Finance and Accounting Service. Taxes That form is what you use to file, so check myPay early.
When Disability Changes the Answer
Not every dollar of military retirement income is taxable. Federal law excludes from gross income any pension or similar allowance received for personal injuries or sickness resulting from active military service.4Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Whether the exclusion reaches your situation depends on when you entered service and how the disability arose.
Combat-Related Disabilities
If your disability came from armed conflict, extrahazardous duty, conditions simulating war, or an instrumentality of war, your disability retirement pay is excluded from federal income tax regardless of when you entered service. This is the broadest of the exclusions.
Non-Combat Disabilities
Service members who entered before September 25, 1975, can exclude disability retirement pay for any service-connected injury, combat or not. Anyone who entered on or after that date with a non-combat disability qualifies for the exclusion only if the Department of Veterans Affairs would grant disability compensation for the same condition.
The VA Waiver
Many retirees receive VA disability compensation on top of regular retired pay. Federal law requires you to waive a portion of your taxable DoD retired pay, dollar for dollar, equal to the VA compensation you receive.5Defense Finance and Accounting Service. VA Waiver and Retired Pay – CRDP – CRSC VA disability compensation is always tax-free,6Veterans Benefits Administration. Compensation so the offset converts that slice of income from taxable to non-taxable while keeping the total dollar amount roughly the same.
CRDP and CRSC Are Taxed Differently
Two federal programs restore some or all of the retired pay lost to the VA waiver, and they carry very different tax bills.
Concurrent Retirement and Disability Pay (CRDP) restores retired pay for retirees with a VA disability rating of at least 50 percent.7Defense Finance and Accounting Service. Concurrent Military Retired Pay and VA Disability Compensation The restored amount flows back into your regular retired pay, which means it is taxable. Choosing CRDP raises your taxable income because it shrinks the VA waiver and replaces it with taxable DoD retired pay.8Defense Finance and Accounting Service. CRDP CRSC FAQs
Combat-Related Special Compensation (CRSC) goes to retirees whose disabilities are linked to combat, extrahazardous duty, conditions simulating war, or an instrumentality of war. CRSC is completely exempt from federal income tax.9Military Pay and Personnel Support. Combat-Related Special Compensation Program Guidance DFAS pays it as a separate deposit, so a CRSC-eligible retiree receives two monthly payments, one taxable and one not. If you qualify for both, compare after-tax value rather than gross dollars, because the tax-free structure of CRSC can beat a larger CRDP figure.
Survivor Benefit Plan Payments
SBP premiums lower your taxable retired pay while you are alive. Once the annuity begins paying a surviving spouse or other beneficiary, those payments are taxable as ordinary income to the recipient. DFAS sends the beneficiary a Form 1099-R each year with the taxable amount, and the beneficiary reports it on their own return.
State Taxes Depend on Your Domicile
Your state tax outcome turns on where you are legally domiciled, not where you happen to live or where you last served. States fall into four groups:
- No state income tax at all. Nine states collect no individual income tax, so a military pension is untouched at the state level.
- Full exemption for military pensions. Several states with an income tax specifically exempt all military retirement pay. Combined with the no-tax states, that puts roughly half of all states at zero state tax on military pensions.10U.S. Department of Veterans Affairs. Unlocking Veteran Tax Exemptions Across States and U.S. Territories
- Partial exemption. Some states exclude only part of the pension, with annual caps commonly in the $12,500 to $24,000 range, and may add age or income limits.
- Full taxation. A smaller group treats military retirement the same as any other pension at the standard state rate.
Rules in this area have been changing quickly, with several states adding or expanding exemptions in recent years, so confirm your state’s current treatment before you file.
If your state does tax retired pay, you can start, stop, or change state withholding through myPay, by submitting DD Form 2866, or by sending a written request to DFAS.11Defense Finance and Accounting Service. How to Start, Stop or Change State Income Tax Withholding from Your Military Retired Pay Through myPay, pick your state and enter a whole-dollar amount of at least $11. On paper, the minimum is a whole-dollar amount greater than $10.
Withholding and Estimated Tax
Retired pay withholding alone often falls short of the total federal bill, especially when you also have a civilian job, investment income, or rental income. The IRS generally expects estimated tax payments if you will owe at least $1,000 in federal tax after withholding and refundable credits.12IRS.gov. Form 1040-ES Estimated Tax for Individuals
To sidestep an underpayment penalty, your combined withholding and estimated payments must reach at least the smaller of 90 percent of your current-year tax or 100 percent of the prior-year tax. That prior-year threshold rises to 110 percent if your adjusted gross income was over $150,000 the year before ($75,000 if married filing separately).13Internal Revenue Service. Estimated Tax Many retirees find it easier to raise withholding through myPay than to mail quarterly checks, because the IRS treats withholding as paid evenly across the year no matter when it was actually taken.