Military pensions are taxable income to the IRS, but the rules differ depending on when you served and how your pension was calculated

If you receive a military pension, you will owe federal income tax on it. The IRS treats military retirement pay the same way it treats other pension income — as taxable compensation. However, the amount you actually owe depends on which military retirement system you fall under, whether you have other income, and which state you live in. Some states do not tax military pensions at all, while others tax them fully.

The key distinction is between the Military Retirement System (MRS), which covered service members who joined before 2006, and the Blended Retirement System (BRS), which applies to those who joined in 2006 or later. Both produce taxable income, but the way you report it on your tax return differs slightly.

Key Takeaways

  • Military pensions are fully taxable federal income and must be reported on your tax return, regardless of how long you served.
  • You will receive a Form 1099-R each January showing your pension payments from the previous year, which you use to report the income.
  • Many states do not tax military pensions at all, even if they tax other retirement income, so your state tax bill may be zero.
  • You can request that the military withhold federal income tax from your pension payments, which reduces what you owe when you file.
  • If you receive a lump-sum payment when you retire or separate, that amount is also taxable and may be subject to additional withholding rules.

How the IRS treats military pension payments

The IRS requires you to report your military pension as ordinary income on your federal tax return. You will receive a Form 1099-R in January of each year, which shows the total pension payments you received in the prior calendar year. This form goes to the IRS and to you, and you use it to fill out your tax return.

The pension amount shown on your 1099-R is the gross amount before any withholding. If you requested federal income tax withholding from your pension, that withheld amount will also appear on the form. The withholding reduces your tax bill when you file, similar to how an employer withholds taxes from a paycheck.

You report the pension income on Form 1040 (the main individual income tax return) under the section for pensions and annuities. If you use tax software, it will walk you through entering the 1099-R information. If you file by hand or with a tax preparer, they will use the 1099-R to complete this section.

The difference between MRS and BRS for tax purposes

Service members who joined before January 1, 2006, fall under the Military Retirement System. Those who joined on or after that date are in the Blended Retirement System. For tax reporting, the difference matters mainly if you received a lump-sum payment.

Under MRS, if you took a lump-sum payment of your accrued pension when you separated, that payment is taxable in the year you received it. Under BRS, the rules are similar, but the structure of the payment may differ because BRS includes a Thrift Savings Plan (TSP) component. Any lump sum from either system counts as taxable income in the year of receipt.

For ongoing monthly pension payments, both systems work the same way: you report the full amount as income each year on your 1040. The system you are under does not change your federal tax obligation, only the structure of your retirement benefit.

State income tax on military pensions

This is where military pensions receive special treatment. Many states do not tax military retirement income at all, even if they tax other types of pensions or income. The list includes Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. However, this list changes, and some states have income limits or other conditions.

If you live in a state that does tax military pensions, you will need to report the pension income on your state return as well as your federal return. Your 1099-R will show whether any state tax was withheld. If you live in a state with no income tax, you owe nothing to that state regardless of the pension amount.

If you moved to a new state after retiring, you may owe tax to your former state on the portion of the year you lived there, depending on that state's rules. This is a situation where a tax preparer familiar with your state can save you money by ensuring you file correctly in both states.

How to set up tax withholding on your military pension

You do not have to wait until you file your tax return to pay federal income tax on your pension. You can request that the military withhold a set amount from each monthly payment, which reduces the tax you owe when you file.

To set up withholding, you complete Form W-4P (Withholding Certificate for Pension or Annuity Payments) and submit it to the Defense Finance and Accounting Service (DFAS). You can request a specific dollar amount to be withheld each month, or you can use the IRS withholding calculator at irs.gov to estimate how much you need withheld based on your total income for the year.

If you do not request withholding, you may owe a large tax bill when you file your return. This is especially true if you have other income — from a job, a second pension, investments, or self-employment — that pushes you into a higher tax bracket. Setting up withholding early prevents this surprise.

Lump-sum payments and special tax situations

If you received a lump-sum payment when you separated or retired — whether from MRS, BRS, or a Survivor Benefit Plan — that amount is taxable income. The military will withhold federal income tax from the lump sum, usually at a flat rate, and report it on your 1099-R.

In some cases, a lump-sum payment may be large enough to push you into a higher tax bracket for that year, meaning you could owe more tax than the amount withheld. If this happens, you will owe the difference when you file. Conversely, if too much was withheld, you will receive a refund.

If you rolled a lump-sum payment into a traditional IRA or another may have access to retirement account within 60 days, that rollover is not taxable. However, any amount you did not roll over is taxable in the year you received it. This is an area where a tax preparer can help you understand your options before you receive the payment.

Reporting military pension income on your tax return

When you file your federal return, you will enter the information from your 1099-R into the pensions and annuities section of Form 1040. If you use tax software, it will prompt you to enter the gross amount and any withholding. If you file by hand, you will write the amounts on the appropriate lines.

Keep your 1099-R with your tax records for at least three years. The IRS matches the 1099-R it receives from DFAS with the amount you report on your return, so the numbers must match exactly.

If you have questions about your 1099-R — for example, if the amount seems wrong or if you did not receive one — contact DFAS directly. They can verify the amount and reissue the form if needed. Do not guess or estimate; use the exact figure from the form.

Frequently Asked Questions

Do I have to pay taxes on my military pension if I live overseas?

Yes, you still owe federal income tax on your military pension even if you live outside the United States. You will still receive a 1099-R and must file a U.S. tax return. However, you may be able to exclude some foreign earned income under the Foreign Earned Income Exclusion, though military pension income does not may have access to for this exclusion. Consult a tax preparer who handles expat returns.

What if I am receiving both a military pension and Social Security?

Both are taxable income. You will receive separate 1099-R forms for each. Depending on your total income, up to 85 percent of your Social Security benefits may also be taxable. The military pension does not reduce your Social Security tax, but it does count toward the income thresholds that determine how much of your benefits are taxed.

Can I deduct anything from my military pension income?

No, military pension income is reported as-is on your tax return. You cannot deduct the amount you contributed during your service. However, you may be able to claim other deductions — such as the standard deduction or itemized deductions — which reduce your overall taxable income.

What happens if I did not have enough tax withheld from my pension?

You will owe the difference when you file your return. To avoid this in future years, contact DFAS and request additional withholding on Form W-4P. You can also make estimated tax payments quarterly if you prefer to spread the payments throughout the year rather than pay a lump sum at tax time.

Is there a way to avoid paying taxes on my military pension?

No. Military pensions are taxable income under federal law. However, you can reduce your tax bill by living in a state that does not tax military pensions, by claiming all deductions you are may have access to to, and by ensuring the correct amount of tax is withheld from your payments.