Military retirement pay taxes work like this: the federal government treats your pension as ordinary income and taxes it at rates from 10% to 37% for 2026, but Social Security and Medicare tax don’t apply, and about three-quarters of states either have no income tax or fully exempt military pensions. Where you live, how much VA disability compensation you receive, and how you draw down the Thrift Savings Plan can each shift your after-tax income by thousands of dollars a year.
Federal Tax on Your Pension
The IRS treats military retired pay the same as any other pension. Under 26 U.S.C. § 61, gross income includes compensation, pensions, and annuities from any source, and your monthly retirement check falls squarely inside that definition.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined Every dollar of gross retired pay, minus pre-tax deductions like Survivor Benefit Plan premiums, lands on your federal return as taxable income.2MyArmyBenefits. Federal Taxes on Veterans’ Disability or Military Retirement Pensions
The rate you actually pay depends on your total income and filing status. For 2026 the seven brackets run from 10% at the bottom to 37% on income above the top threshold, and those thresholds shift slightly each year for inflation.
One point trips up a lot of new retirees. The combat zone tax exclusion that made active-duty pay tax-free while you were deployed does not follow you into retirement. It applied to basic pay, reenlistment bonuses, hostile fire pay, and similar active-duty compensation. Retired pay is not on the list.3Internal Revenue Service. Tax Exclusion for Combat Service
No Social Security or Medicare Tax on the Pension
Military retirement pay is not earned income for payroll tax purposes, so no Social Security tax (6.2%) and no Medicare tax (1.45%) come out of your monthly check.4MyArmyBenefits. Federal Taxes on Veterans’ Disability or Military Retirement Pensions A civilian post-retirement job still gets FICA withheld from those wages, but the pension itself is exempt.
How the Pension Can Trigger Tax on Your Social Security
The pension isn’t subject to payroll tax, but the IRS still counts it when deciding whether your Social Security benefits become taxable. Combined income for this test equals your adjusted gross income (which includes the pension), plus any nontaxable interest, plus half of your Social Security benefits for the year.
Single filers hit the thresholds here:
- $25,000 to $34,000: up to 50% of Social Security benefits become taxable.
- Above $34,000: up to 85% become taxable.
Married filing jointly:
- $32,000 to $44,000: up to 50% become taxable.
- Above $44,000: up to 85% become taxable.
A pension of $30,000 or $40,000 pushes most retirees over these lines on its own, and a civilian salary, investment income, or a TSP withdrawal seals it. Congress never indexed these thresholds for inflation, so more retirees cross them every year.5Internal Revenue Service. IRS Reminds Taxpayers Their Social Security Benefits May Be Taxable
State Taxes Depend on Where You Live
State treatment falls into three groups, and the trend has run heavily in retirees’ favor. Nine states have no individual income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In those states your pension faces zero state income tax along with every other kind of income.
Roughly 28 additional states impose an income tax but fully exempt military retirement pay. The exemption typically works as a subtraction on the state return: you report the pension and then deduct it, zeroing out state tax on that income.
That leaves about 13 states and the District of Columbia where some or all of your military retirement pay is taxed. Some offer partial exclusions, sheltering a set dollar amount or percentage while taxing the rest at ordinary state rates. Others treat it like any other income. State rates around the country generally sit between 2% and 10%, so the potential bite varies widely by state.
Your State of Legal Residence Controls
Your state of legal residence, not where you happen to be on any given day, decides which state gets to tax the pension. Establishing residence in a new state usually takes a combination of actions that show intent to stay: registering to vote, getting a driver’s license, registering a vehicle, and buying or leasing a home. No single step is usually enough, but together they build the picture.
Moving from a state that taxes your pension to one that doesn’t can be one of the biggest financial decisions you make in retirement. And watch this detail: DFAS does not automatically stop your state withholding when you change your mailing address. If you move to a no-tax state, you have to log into myPay and stop the state withholding yourself, or you’ll keep sending money to your old state.
VA Disability, the Offset, CRDP, and CRSC
VA disability compensation is completely exempt from federal income tax under 26 U.S.C. § 104(a)(4), which excludes amounts received for personal injuries or sickness resulting from active service.6Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness States follow suit, so VA disability pay is tax-free across the board.
For retirees who receive both a longevity pension and VA disability, the interaction between the two is where the biggest tax planning opportunities sit.
The VA Offset (Waiver)
Federal law generally prohibits collecting full retired pay and full VA disability at the same time. Under the standard offset, your taxable retired pay is reduced dollar-for-dollar by the tax-free VA disability you receive. Your total monthly income doesn’t change, but a chunk of it shifts from the taxable column into the tax-free column, lowering your federal bill.
CRDP vs. CRSC
Two programs restore some or all of the money lost to the offset, and they carry very different tax consequences.
Concurrent Retirement and Disability Pay (CRDP) is available to retirees with a VA disability rating of 50% or higher and at least 20 years of service. CRDP restores some of the offset retired pay, and the restored amount is taxable like any other retired pay.7Congress.gov. Concurrent Receipt of Military Retired Pay and Veteran Disability
Combat-Related Special Compensation (CRSC) is available to retirees whose disabilities are directly connected to combat or combat-related training. CRSC payments are fully exempt from federal income tax under § 104. If you qualify for both, you pick one; you can’t collect both at the same time.8Defense Finance and Accounting Service. Combat-Related Special Compensation Guidance9Defense Finance and Accounting Service. CRDP-CRSC FAQs Running the numbers both ways before you elect can be worth thousands of dollars a year in tax-free income.
Retroactive Ratings Can Unlock Refunds
When the VA grants a retroactive disability rating, it can reclassify previously taxable pension income as tax-exempt for those prior years. You file amended returns on Form 1040-X for each affected year to claim the refund. The normal three-year deadline for a refund claim is extended by one year running from the date of the VA’s determination, and the extended window does not reach back further than five years before that determination date.10Internal Revenue Service. Frequently Asked Questions Regarding Disabled Veterans Pension Income Veterans who don’t file the amendments leave that money with the IRS.
Survivor Benefit Plan Premiums and Payouts
The Survivor Benefit Plan gives the retiree a tax break during life and creates a tax bill for the beneficiary after death. The premium, roughly 6.5% of your elected base amount, comes out of your gross retired pay before taxes. The IRS treats this as an exclusion from income rather than a deduction you claim, so it automatically lowers your taxable pension each month.11Soldier for Life. Survivor Benefit Plan Fact Sheet – Taxes and SBP
When you die and the annuity starts paying out, the full amount is taxable as ordinary income to the beneficiary at whatever bracket applies to their total income. Premiums get a tax break going in; payouts are fully taxed coming out.
TSP Withdrawals Stack on Top of the Pension
Most military retirees also hold a Thrift Savings Plan account, and withdrawals sit on top of your pension for tax purposes. The rules depend on which side of the plan the money came from.
Traditional TSP withdrawals, including both contributions and earnings, are taxable as ordinary income. You deferred taxes going in and pay them coming out.12Thrift Savings Plan. Tax Rules About TSP Payments
Roth TSP contributions come out tax-free because you already paid income tax on them. Earnings are also tax-free if the distribution is qualified, meaning at least five years have passed since your first Roth contribution and you’re 59½, permanently disabled, or deceased.
If you contributed tax-exempt combat zone pay to your traditional TSP, those specific contributions are not taxed again on withdrawal, though the earnings on them are. Combat zone contributions to the Roth TSP follow ordinary Roth rules.
Withdrawals from the traditional balance before age 59½ generally trigger a 10% early withdrawal penalty on top of income tax. Reservists called to active duty for more than 179 days may qualify for relief from the penalty. A large traditional TSP withdrawal in the same year as your pension can push you into a higher bracket, so the size and timing of those withdrawals matter.
Withholding and Estimated Payments
DFAS handles all military retired pay through myPay. You can log in and update federal tax withholding by submitting a new IRS Form W-4P, which lets you set your filing status and add an extra dollar amount per check.13Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments Changes typically take three to seven business days to process, and a change made late in the month may not appear until the next payday.14Defense Finance and Accounting Service. Retired and Annuitant Pay Processing – How Long Does It Take State withholding is also available through myPay for states that have an agreement with DFAS.
If pension withholding doesn’t cover your full liability, quarterly estimated payments fill the gap. For 2026 they’re due April 15, June 15, September 15, and January 15, 2027.15Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals You can skip them entirely if you expect to owe less than $1,000 after withholding and credits. Otherwise, avoid the underpayment penalty by covering at least 90% of your 2026 liability or 100% of your 2025 tax through the year, whichever is smaller. If your 2025 adjusted gross income was above $150,000, that second figure becomes 110% instead of 100%.
What Underpayment Costs
Coming up short on federal taxes triggers an underpayment penalty that runs like interest on the balance. For the first quarter of 2026 the IRS charges 7% per year on underpayments, compounded daily, and the rate is reset quarterly.16Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
For retirees who fall seriously behind, the IRS has stronger tools. Under the Federal Payment Levy Program, authorized by 26 U.S.C. § 6331(h), the IRS can levy up to 15% of your military retirement pay each month to collect overdue taxes. The levy is continuous and stays in place until the debt is paid off or you work out an alternative with the IRS.17Internal Revenue Service. Federal Payment Levy Program Getting your retirement check cut by 15% on top of regular withholding is a hard way to find out your withholding wasn’t keeping up.