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. Story updated July 3 to reflect additional Vermont information.  

Two states recently exempted a portion of military retirement pay and survivor benefits from state income tax, with California enacting a new partial exemption and Vermont increasing the number of retirees and survivors who will qualify for tax relief.

Here’s a look at the changes in both states, and a short update on other state legislatures:

California

The new tax rules, included in state budget legislation signed by Gov. Gavin Newsom on June 27, will exempt $20,000 of military retiree or survivor benefit pay from state taxes beginning with the 2025 tax year. The law sunsets before the 2030 tax year.

[RELATED: MOAA's Military State Report Card and Tax Guide]

The exemption covers the armed services as well as commissioned corps retirees from the U.S. Public Health Service and NOAA. Legislation with a similar exemption – AB 53, introduced by Assemblymember James Ramos – had passed the state Assembly on May 29.

That bill, supported by MOAA’s California Council of Chapters (CALMOAA) and other advocacy groups, had been modified from earlier legislation which would have fully exempted retirement pay and survivor benefits.

“CALMOAA appreciates and thanks California State Assemblymember James Ramos, who has introduced legislation over the past three years to provide a full exemption on uniformed services retirement pay and survivor benefit pay,” said Cmdr. Jeff Breiten, USN (Ret), vice president of legislative affairs for CALMOAA. “Although retirees did not receive a full exemption that Assemblymember Ramos and CALMOAA had advocated for, the partial exemption is a major accomplishment and step in the right direction.”

The full text of SB 132, one of several bills that make up the state’s budget package, is available here.

[RELATED: What State Topped This 2025 ‘Best for Military Retirees’ Survey?]

Vermont

A tiered exemption for military retirement pay and survivor benefits signed by Gov. Phil Scott on June 25 will exempt all such pay and benefits for taxpayers with a federal adjusted gross income (AGI) of $125,000 or less.

Those with a federal AGI of more than $125,000 but less than $175,000 will receive a proportional exemption, as outlined by S. 51 – AGI will be subtracted from $175,000, that value will be divided by $50,000, and the new figure will be multiplied by the amount of the retirement or survivor benefit received to determine the exemption.

Taxpayers with more than $175,000 in federal AGI will not receive an exemption.

The change will take effect in the 2025 tax year. Current law allows Vermont taxpayers with less than $50,000 in gross income ($65,000 married filing jointly) to exempt $10,000 of retirement pay or survivor benefits, with the exemption phased out over the next $10,000 in retirement income.

The bill does not mention USPHS or NOAA retirees, but a 2024 Vermont tax publication lists retirement pay received by members of those commissioned corps as a "source of military retirement income."

[RELATED: Retirement Pay Error Affects Thousands of Guard, Reserve Members]

Other State Updates

• Oregon: While SB 225-A, which would have exempted up to $17,500 in military retirement pay for retirees 63 years and older, was recommended for passage by the Senate Revenue Committee, it did not reach a floor vote before the session ended June 27. Existing partial exemptions apply only to service prior to 1991.
• Delaware: The state’s legislative session ended June 30 without any bills introduced that would affect the state’s partial retirement pay exclusion. A 2024 Senate bill that would have doubled the existing exemption over a three-year span did not advance out of the chamber’s Executive Committee.

Keep up with more financial news, and access member-exclusive financial resources, at MOAA.org/Finance.