When you joined the military as a young person and headed for basic training, retirement income might have been a small consideration. But if you’ve reached the age when retirement pensions and tax obligations play a role in your long-term planning, the Internal Revenue Service’s treatment of your military pension is of more immediate concern.
Military retirement pay is generally subject to federal tax and withholding, as is federal annuity pay through the civilian retirement system.
Military Pensions and Federal Tax
If you receive a Department of Defense pension that’s based on your rank, time in service and final pay, the IRS treats this as new income and requires you to report it as income. Because these pensions weren’t funded by withholding from your paycheck, they’re subject to income tax as other earnings are. Report the amount of your military pension on lines 16a and 16b of your Form 1040 or 12a and 12b of your Form 1040A.
The Department of Defense will withhold estimated income taxes on your retirement pension if you submit a Form W-4 to notify it of your withholding situation. In this case, taxes on your pension are withheld as you receive it just like income from employment is. While this may not eliminate your year-end tax bill if you have other sources of income, withholding protects you against penalties for late payment and interest that may accrue if you don’t contribute taxes in a pay-as-you-go fashion.
Implications for Social Security
Receiving an armed forces pension doesn’t exclude you from receiving a Social Security retirement pension as well. While Social Security retirement benefits on their own aren’t usually taxable, you may be taxed on a portion of your benefit if your military pension and other sources of income are large enough.
If half of your Social Security benefit plus all of your other income, including your military pension, exceeds $25,000 for individuals and $32,000 for married couples filing jointly, some of your Social Security income is subject to tax. The taxable portion varies by the amount of your other earnings.
There are a number of states that don't tax military retirement pay, or only tax a portion of it, so you may get a tax break from your state even if you're required to pay federal tax.
Federal and State Exemptions for Disabled Veterans
If your retirement includes benefits for disabilities suffered in the line of service, any disability penalty you were entitled to receive before Sept. 25, 1975, is not taxable. Disability benefits you receive from injuries suffered from combat, from training for combat or through an act of war, such as a terrorist attack, since Sept. 25, 1975, are also not taxable. If you receive a qualifying military disability pension, do not report it as income. Instead, only report the portion of your pension that you receive for time in service.
Some states and communities also offer property tax exemptions for veterans and disabled veterans. Hawaii is one of the best states for disabled veterans to own property in, since it offers a full property tax exemption for 100 percent disabled veterans on their primary residences, and other states offer a variety of benefits as well.
- IRS: Military Retired Pay and Federal Tax Withholding
- IRS: Publication 17 -- Wages, Salaries and Other Earnings
- Social Security Administration: Retirement Planner -- Military Service
- IRS: Are Social Security Benefits Taxable?
- Military.com: More Than Half Of All States Now Don't Tax Military Retired Pay
- Veterans United: Full List of Property Tax Exemptions By State
- AARP: How Is Social Security Taxed?
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.