Is Military Retired Pay Taxable?
Military retired pay is fully taxable as ordinary income at the federal level. The IRS treats it the same as wages, so you must report it every year. Defense Finance and Accounting Service (DFAS) sends you a 1099-R form each January showing your gross retired pay and any federal tax withheld.
Your 1099-R: What Each Box Means
Your 1099-R from DFAS contains the information you need to file your federal return accurately.
- Box 1 (Gross Distribution): Your total retired pay before any deductions, including SBP premiums.
- Box 2a (Taxable Amount): The amount subject to federal income tax. If you receive CRSC, it is excluded here.
- Box 7 (Distribution Code): Code "7" means normal distribution from a retirement plan.
- Box 12 (State Tax Withheld): Any state income tax withheld, if applicable to your state.
You can access your 1099-R and update withholding anytime through myPay at mypay.dfas.mil. Use the federal withholding section to adjust your W-4P elections.
Federal Income Tax on Military Retirement
Federal tax on military retired pay follows ordinary income tax brackets — the same rates applied to wages and salaries. In 2026, the seven brackets run from 10% to 37%. Most E-7 retirees with 20 years fall in the 12% to 22% bracket depending on total household income.
You can request additional withholding in myPay to avoid a tax bill at filing. If you had less than $1,000 owed last year, you generally avoid an underpayment penalty.
CRSC vs. CRDP: Key Tax Difference
Combat-Related Special Compensation (CRSC) is completely tax-free, because it replaces a portion of retired pay with a disability payment tied to combat injury. You do not report CRSC on your return as income.
Concurrent Retirement and Disability Pay (CRDP) is different. CRDP restores retired pay that was previously offset by VA disability pay. Because it flows through DFAS as retired pay, CRDP is fully taxable at the federal level — just like regular retired pay.
If you are eligible for both, the tax difference can be significant. Veterans rated 60% or higher who qualify for CRSC may reduce their taxable income by choosing CRSC over CRDP in some situations. Consult a tax professional before switching.
Survivor Benefit Plan (SBP) Premiums
SBP premiums are deducted from your gross retired pay before your taxable amount is calculated — but only in specific situations.
- Spouse or child coverage: The standard SBP premium is 6.5% of your covered base amount (often stated as 22.75% of the SBP base, which is 55% of covered retired pay). These premiums are not deductible on your federal return if coverage is for your current spouse.
- Former spouse coverage under a divorce decree: Premiums paid under a court order for a former spouse may be deductible as alimony under pre-2019 divorce rules. Consult a CPA.
- SBP annuity payments to survivors: When a surviving spouse receives SBP annuity payments, those payments are taxable income to the survivor — not tax-free like VA DIC payments.
TSP Withdrawals and Military Retirement
Your Thrift Savings Plan balance is a separate income stream with its own tax rules.
- Traditional TSP withdrawals: Fully taxable as ordinary income in the year you take them. DFAS issues a 1099-R for TSP distributions.
- Roth TSP withdrawals: Contributions come out tax-free. Earnings are also tax-free if you are 59½ or older and the account has been open at least 5 years.
- TSP required minimum distributions (RMDs): Begin at age 73 under current law (SECURE 2.0). Roth TSP is not subject to RMDs after 2024.
Stacking retired pay, CRDP, and traditional TSP withdrawals in the same year can push you into a higher bracket. Many retirees do Roth conversions in low-income years before Social Security begins.
State Income Tax on Military Retired Pay (2026)
State tax treatment of military retired pay varies widely. As of 2026, here is how each category breaks down.
States With No Income Tax (All Retirement Income Is Tax-Free)
Nine states levy no individual income tax at all, so military retired pay faces zero state tax: Florida, Texas, Washington, Nevada, Wyoming, South Dakota, Alaska, and states with no tax on earned income (New Hampshire, Tennessee — both now fully exempt investment income too).
States With Full Military Retirement Exemption
Several states that do levy income tax fully exempt military retired pay: Alabama, Arkansas, Connecticut, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland (for veterans 65+), Michigan, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Utah, Virginia, Wisconsin (verify annually — statutes change).
States With Partial Exemption
States such as Colorado, Idaho, Minnesota, Montana, North Dakota, Oklahoma, Rhode Island, Vermont offer partial exemptions based on age, income, or years of service. The exempt amount and phase-out thresholds differ. Check your state's department of revenue for the current year's limits.
States That Fully Tax Military Retired Pay
A small number of states — including California — tax military retired pay the same as any other income with no special exemption for the military. If you retire and move to California, your full retired pay is subject to California's income tax rates (up to 13.3% for high earners).
| Category | Example States | 2026 Status |
|---|---|---|
| No state income tax | FL, TX, WA, NV, WY, SD, AK | 100% tax-free |
| Full military exemption | AL, AR, IL, MS, PA, VA | Retired pay exempt |
| Partial exemption | CO, ID, MN, OK, VT | Age/income phase-outs apply |
| Fully taxable | CA | No special exemption |
Tips to Reduce Your Tax Bill
- File as a resident of a no-tax or full-exemption state if you genuinely domicile there.
- Elect Roth TSP contributions early in your career to build a tax-free bucket.
- If eligible, choose CRSC over CRDP in years when the CRSC amount is higher — and benefit from the tax-free treatment.
- Consider a Roth conversion ladder between retirement and age 62 when income is lower.
- Use myPay to set withholding accurately and avoid a big April surprise.
For a personalized estimate of your after-tax retirement income, use the Military Retirement Calculator. For a full overview of military retirement systems and eligibility, visit our Military Retirement hub. To understand how the Blended Retirement System affects your taxes, see our BRS Explainer.
Key Takeaways
- Military retired pay is federally taxable as ordinary income; DFAS reports it on a 1099-R each January.
- CRSC is tax-free; CRDP is taxable — knowing the difference can save thousands per year.
- More than 40 states offer full or partial exemptions on military retired pay as of 2026.
- Roth TSP withdrawals in retirement are tax-free; traditional TSP distributions are fully taxable.
Frequently Asked Questions
Do I pay Social Security taxes on military retired pay?
No. Military retired pay is not subject to Social Security (FICA) or Medicare payroll taxes. It is treated as a pension, not wages, so no payroll tax applies.
Is my VA disability compensation taxable?
No. VA disability compensation is completely tax-free under 26 U.S.C. § 104. It is not reported on your 1099-R and does not appear on your federal return.
How do I stop DFAS from withholding state taxes if I move to a no-tax state?
Log in to myPay and update your state of legal residence. Once DFAS reflects your new state, withholding will stop. Keep a copy of your domicile documentation (driver's license, voter registration) in case of audit.
Can I deduct SBP premiums from my federal taxes?
Generally no — SBP premiums for a current spouse are not deductible. Premiums paid under a pre-2019 divorce decree for a former spouse may be deductible as alimony. Post-2018 divorce decrees eliminated the alimony deduction.
What form do I use to report military retired pay?
Report the taxable amount from your DFAS 1099-R (Box 2a) on IRS Form 1040, Line 5b (Pension and Annuity Income). If your state has an exemption, subtract it on your state return per your state's instructions.
My state partially exempts military retired pay. How do I claim it?
Each state has its own form or schedule. In Virginia, for example, qualifying veterans use Schedule ADJ. Check your state's department of revenue website for the current year's subtraction worksheet and income limits.
Start Planning Your After-Tax Retirement Income
Understanding your tax picture is the first step to a solid retirement plan. Use the Rank and Pay Military Retirement Calculator to model your gross and estimated net retirement income — including TSP, VA disability, and Social Security — in one place.