Is your state still fully taxing retirement pay? MOAA National serves in an advisory capacity for state-specific issues such as income tax exemption. Please contact your local MOAA council as state legislation must originate at the state level.
North Dakota and Indiana are the latest to join the list of states that have approved at least a partial exemption on taxing military retiree income.
Both states will offer full exemptions on military pay as well as surviving spouse benefits. However, neither state will extend exemptions to retirees of the U.S. Public Health Service or the National Atmospheric and Oceanic Administration.
Almost every state offers at least a partial exemption on state income tax for military retirees. MOAA’s Military State Report Card and Tax Guide tracks changes in these benefits, with full breakdowns of state tax policy available to Premium and Life members.
In North Dakota’s historic decision, military retirees will move from full taxation to full exemption on their state income taxes.
The bipartisan legislation, which was signed into law by Gov. Doug Burgum in April, provides the exemption for armed forces beginning in the 2019 tax year. The exemption helps level the regional playing field, as North Dakota had been competing with neighboring states Minnesota, which has a state income tax exemption for such income, and South Dakota, which doesn’t have a state income tax.
“This legislation promotes workforce participation by military personnel in North Dakota after retirement, improves our state’s competitiveness for federal military investments, and most importantly, honors the courageous service of our military servicemen and women,” Burgum said.
Each veteran would receive an average of $550 in tax relief, State Rep. Steve Vetter, the bill’s author, told the Grand Forks Herald. That would reduce state general revenues by about $3 million, but Vetter and other supporters say keeping a veteran and his or her family in the state provides benefits, financial and otherwise, that will make up the lost money.
“We want to retain our military members after service to fill our many vacant job openings, keep their skills to use on our main street businesses and attend our institutes of higher learning,” said Lonnie Wangen, commissioner of North Dakota’s Department of Veteran Affairs. “I believe this exemption will have a positive impact on our economy, which will outweigh the cost of the exemption.”
In Indiana, the exemption will be phased in over four years.
Previously, Indiana offered only a partial exemption for retirees – about $6,250. Under the new law, the exemption is increased by about 25 percent each year until 2023, when the exemption will total 100 percent.
Exempting military retirement benefits from Indiana’s 3.23% income tax will reduce state revenue by about $15 million a year when fully implemented in the 2023 budget year, according to a report. The exemption will encourage military personnel to stay in – or consider moving to – Indiana, legislators have said.
Col. Andrew F. Gothreau, USA (Ret), president of MOAA’s Indiana Council of Chapters, said the council supported the bill through the Military/Veterans Coalition of Indiana, which regularly met with lawmakers to lobby for its passage.
Gothreau said the legislation is a victory, but is disappointed it will take four years to enact.
“We support the new law because it will encourage more veterans to retire in Indiana,” he said. “However, we are discouraged that the law will not cover 100 percent of military retired income until 2023. At present, Indiana does not rate very high as a ‘military friendly’ state. Hopefully, the new law will change this recognition.”