March 26, 2026
8 minutes
Quick Answer: What States Don’t Tax Military Retirement in 2026?
Military retirement is still taxed at the federal level in 2026.
But at the state level, the rules vary:
- Some states have no income tax at all (so your military pension is 100% state tax-free).
- Some states fully exempt military retirement pay.
- Some offer partial exclusions or income thresholds.
- A few states still tax it as regular income.
If you just want the list - here it is.
If you're still confirming eligibility before choosing a state, review the updated VA loan eligibility requirements.
States With No State Income Tax (2026)
Your military retirement is 100% tax-free at the state level here:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
If you're comparing zero-income-tax states like Florida and Texas, here’s a deeper look at what property tax in Florida actually costs:
States That Fully Exempt Military Retirement Pay (2026)
These states tax income generally, but do not tax qualified military retirement pay:
- Alabama
- Arizona
- Arkansas
- Connecticut
- Hawaii
- Illinois
- Indiana
- Iowa
- Kansas
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Nebraska
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Pennsylvania
- South Carolina
- Virginia
- West Virginia
- Wisconsin
Before choosing a “fully exempt” state, compare total cost of living and housing trends that influence your real buying power.
States With Partial Exemptions or Income Limits
These states may exclude a portion of military retirement pay or apply age/AGI thresholds:
- Colorado
- Delaware
- Georgia
- Idaho
- Kentucky
- Montana
- Oregon
- Rhode Island
- Utah
- Vermont
Income thresholds can affect VA loan approval math - especially your debt-to-income ratio. Here’s how DTI impacts approval.
States That Still Tax Military Retirement as Regular Income (2026)
- California
If you receive $40,000–$60,000 in annual military retirement, a 5–8% state income tax could cost:
- $2,000–$4,800 per year
- $20,000–$48,000 over 10 years
That’s money that could go toward:
- A lower mortgage payment
- Paying down principal faster
- Investing for compounding growth
The difference between a tax-free and taxable state can directly affect your VA loan buying power and monthly cash flow.
If you're considering relocation in 2026, reviewing this list carefully could mean keeping thousands more per year.
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Is Military Retirement Taxable in 2026?
Yes, but where you live determines how much you actually keep.
Military retirement pay is generally treated as taxable income. However, the real financial impact depends on two layers:
- Federal taxes (always apply in most cases)
- State taxes (vary dramatically by state in 2026)
That difference can mean thousands of dollars per year.
If you're also receiving disability compensation, compare the updated VA disability pay scales here.
Federal Taxes: Yes, Military Retirement Is Taxed as Income
Military retirement pay is taxed at the federal level as ordinary income under IRS rules.
If you receive:
- $50,000/year in retirement pay
- And fall into a 22% marginal bracket.
That could mean roughly: $11,000 in federal tax exposure (before deductions/credits)
Important distinction:
- VA disability compensation is tax-free
- Concurrent retirement and disability pay rules vary
State Taxes: This Is Where You Win - or Lose - Thousands
In 2026, state treatment falls into four categories:
- No income tax
- Full military retirement exemption
- Partial exclusion
- Fully taxable (e.g., California)
Here’s the math most retirees overlook:
If your state tax rate is 6% and you receive $60,000/year:
- That’s $3,600 per year
- $36,000 over 10 years
- Potentially $72,000+ over 20 years
That’s not a small policy detail - that’s a down payment, a fully funded Roth IRA, or years of property taxes.
If you're evaluating how taxes influence mortgage affordability, this breakdown of percentage-of-income guidelines can help:
The Hidden Multiplier: Buying Power
Lower state taxes don’t just mean savings.
They can:
- Improve your debt-to-income ratio
- Increase VA loan approval flexibility
- Boost monthly cash flow
- Accelerate equity growth
A $300/month tax difference can translate into tens of thousands more in home-buying power.
2025–2026 Military Retirement Tax Law Changes (2026 Update)
Tax policy isn’t static - and 2026 brings meaningful shifts that directly affect military retirees.
Several states have updated their retirement tax treatment, expanding exemptions and eliminating income taxes altogether. If you last checked this list in 2023 or 2024, the landscape has changed.
Here’s what matters now.
New Hampshire Eliminated Its Income Tax
New Hampshire has fully eliminated its tax on interest and dividends, completing its transition to a no-income-tax state in 2026.
Impact: Military retirement is now 100% tax-free at the state level.
For a retiree earning $55,000 annually, that could mean avoiding $2,000–$3,000 per year compared to moderate-tax states.
South Carolina Expanded to Full Exemption
South Carolina completed its phase-in to provide a full military retirement exemption by 2026.
- Previously partial, the state now joins the fully exempt category.
- That shift alone can preserve $3,000+ annually for many retirees.
Vermont Adjusted AGI Thresholds
Vermont increased income thresholds for retirement exclusions.
Military retirees under certain AGI levels may now qualify for broader exemptions - but higher-income households may still owe tax.
Translation: Income planning matters more in 2026.
Arizona & Georgia Strengthened Exemptions
Arizona continues to fully exempt military retirement pay.
Georgia reinforced its exemption structure, providing expanded relief for qualifying retirees under updated income rules.
These adjustments solidify both states as strong tax-friendly destinations for military retirees.
State-by-State: Does Each State Tax Military Retirement in 2026?
Military retirement is taxed federally, but state treatment varies widely.
Here’s the fast, searchable breakdown in 2026:
| State | 2026 Status |
|---|---|
| Florida | No state income tax |
| Texas | No state income tax |
| Georgia | Full exemption under current law |
| Virginia | Phase-in complete for most retirees |
| North Carolina | Bailey Exclusion applies to qualifying retirees |
| California | Fully taxable as regular income |
| Arizona | Fully exempt |
| South Carolina | Full exemption in 2026 |
| Tennessee | No state income tax |
| Nevada | No state income tax |
| Alabama | Fully exempt |
| Pennsylvania | Fully exempt |
| New York | Fully exempt |
| Ohio | Fully exempt |
| Idaho | Income-based deduction |
| Montana | Income threshold applies |
| Vermont | AGI-based exemption |
If you receive $60,000 per year in military retirement pay:
- In a 6% taxable state, → $3,600 per year is lost
- Over 10 years → $36,000
- Over 20 years → $72,000+
That’s not a minor policy difference.
That’s a new roof, a paid-off car, or a significant chunk of home equity.
Best States for Military Retirement in 2026
If you’re picking a “best state,” don’t stop at income tax on your pension. The real wallet leak is the combo of: state taxes + property taxes + home insurance + home prices.
A “tax-friendly” move can still cost you $50,000–$100,000+ over a decade if property taxes + insurance are brutal. (Florida, for example, has the highest median property insurance cost for mortgaged homes.)
2026 Scoring: Taxes + Homebuying Reality (VA-loan friendly lens)
| State | Pension State Tax | Property Tax Pressure | Home Insurance Pressure | Housing Affordability | VA/Healthcare Access | 2026 Total Score (10) |
|---|---|---|---|---|---|---|
| South Carolina | Strong | Low(~0.47% effective) | Moderate | Strong | Strong | 9.2 |
| Virginia | Strong | Medium | Medium | Medium | Strong | 8.3 |
| Strong | Medium | Medium | Strong | Strong | 8.1 | |
| Arizona | Strong | Lower | Medium | Medium | Strong | 7.9 |
| Florida | Strong (no income tax) | Medium | High (highest median) | Medium | Strong | 7.6 |
| Texas | Strong (no income tax) | Often high | Medium | Medium | Strong | 7.3 |
| California | Weak (taxes pension) | Medium | Medium | High | Strong | 5.4 |
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Homebuying cost reality check (simple wallet math)
Assume $60,000/yr military retirement + a $400,000 home:
- A 6% state tax state = about $3,600/yr lost from pension (≈ $300/mo)
- A “low property tax” state like SC (~0.47%) = about $1,880/yr on a $400k home
- Florida’s insurance is the highest median for mortgaged homes (median $2,273/yr)
“No income tax = best.” Not always. If insurance or property taxes spike, your “tax savings” can get eaten alive.
Military Retirement Taxes vs Property Taxes - What Matters More?
For many retirees, property taxes quietly cost more than state income tax ever would.
If you’re buying a home with a VA loan, this isn’t a theory - it’s a monthly payment reality.
The $300,000 Home Example (Simple, Brutal Math)
Let’s compare two states:
| Scenario | Property Tax Rate | Annual Property Tax | 10-Year Cost |
|---|---|---|---|
| State A | 1% | $3,000 | $30,000 |
| State B | 2% | $6,000 | $60,000 |
- That’s a $3,000 per year difference.
- Over 10 years? $30,000 gone.
- Over 20 years? $60,000+.
Now compare that to a 5% state income tax on a $50,000 pension:
- $2,500 per year
- $25,000 over 10 years
In many cases, property taxes create the bigger long-term hit.
Higher property taxes mean:
- Higher monthly escrow payments
- Higher debt-to-income ratio
- Lower VA loan buying power
- Slower equity growth
A $3,000 annual property tax difference = $250 per month added to your housing payment.
That can reduce your purchasing power by $30,000–$40,000 depending on rates.
Beyond pension taxes, your total cost includes:
- Property taxes
- Homeowners insurance
- HOA fees
- State income tax
- Local municipal taxes
A “tax-free pension state” isn’t automatically the cheapest place to live.
How Tax-Free States Increase Your VA Loan Buying Power (2026)
State tax policy doesn’t just affect your retirement income.
It directly affects how much house you can afford.
Here’s why.
DTI Ratio Impact (The Approval Gatekeeper)
VA lenders evaluate your debt-to-income ratio (DTI) to determine approval and maximum loan size.
If you receive:
- $60,000/year military retirement
- And avoid a 6% state income tax
That’s $3,600 per year saved
Or $300 per month added back to your usable income
That $300/month can:
- Lower your DTI
- Increase your approval ceiling
- Strengthen underwriting confidence
In many cases, that can translate to $30,000–$50,000 more purchasing power, depending on rates.
Monthly Cash Flow Advantage
In a fully taxable state:
- $60,000 pension
- 6% state tax
- = $3,600 gone annually
That’s money that could instead:
- Cover property taxes
- Offset homeowners insurance
- Accelerate principal paydown
A tax-free state effectively increases your net monthly housing budget.
Equity Growth Acceleration
Lower tax burden = more retained cash.
If you redirect $3,000 per year into:
- Extra mortgage payments
- A 6–7% diversified investment return
- Or home improvements
Over 10 years, that could mean $40,000–$60,000+ in additional net worth impact.
This is where tax strategy becomes wealth strategy.
Compare Your 2026 Buying Power in a Tax-Free State
Choosing a state isn’t just about taxes.
It’s about how far your retirement income stretches when buying a home.
When eligible buyers use reAlpha real estate and mortgage services, they may qualify to receive up to 1% credit at closing. In certain transactions, that may increase to up to 1.5%, subject to eligibility and lender approval.
On a $400,000 home, that could mean:
- 1% credit = $4,000
- 1.5% credit = $6,000
Combined with state tax savings, the total impact becomes significant.
Next Step
- Check Your VA Eligibility
- Explore homes
The difference between a taxable and tax-free state could mean:
- Thousands more kept each year
- Greater approval flexibility
- Faster equity growth
Every month you delay could mean lost buying power and lost retained income.
FAQs
1. Is military retirement taxable?
It depends on the state. Many states fully exempt military retirement; others partially tax it or tax all retirement income.
2. What states don’t tax military retirement?
Florida, Texas, Tennessee, Nevada, New Hampshire (2025), South Carolina (2025), and many others offer full exemptions.
3. Do retired military pay state taxes on their pension?
Only in states that tax retirement income. In tax-free states, you pay $0.
4. How is military retirement taxed in 2025–2026?
Federal taxes still apply, but state rules vary - from full exemption to partial exemption to full taxation.
5. Which state is best for military retirement?
For 2026, top states include Florida, Georgia, Texas, Arizona, Nevada, and South Carolina due to tax savings + strong affordability.
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Article by
Rocky Billore is a mortgage industry leader and Chief Sales Officer with over two decades of experience across residential and commercial lending. Since entering the industry in 2004, he has been directly involved in funding more than $1.4 billion in loans. A recognized expert in VA and government lending, Rocky combines deep program knowledge with a data driven, relationship-first leadership style. His work focuses on building scalable sales organizations, developing high performing teams, and aligning technology with real world lending outcomes to improve the homeownership experience.