A fairly new state law is phasing out taxes on military retirement and surviving spouse benefits.
INDIANAPOLIS — Tax filing season began Friday and this year Hoosiers are dealing with all kinds of changes and challenges.
Military retirees and surviving spouses in Indiana will get some additional benefit this year, unrelated to the pandemic. Our VERIFY team received a question about the details and is sorting out what that change means for veterans.
THE QUESTION
John wrote an email saying, “The Governor signed a bill making military pay and retirement pay exempt [from] IN State taxes. Is this a fact and how does it work.”
THE ANSWER
John’s question is partially correct.
Pay for working in the military is taxed in Indiana, though there is a $5,000 deduction for many personnel.
Military retirement benefits and surviving spouse benefits will soon be exempt from taxes. Governor Eric Holcomb signed a law in 2019 that phases out any taxes on those benefits by 2022.
SOURCES
To find answers to this question, we spoke with the Indiana Department of Revenue, as well as Antoine Jones at B F Tax Management. Jones is an enrolled agent, which means he is credentialed through the IRS to represent taxpayers in all kinds of cases before the agency. He also assists clients with tax preparation.
WHAT WE FOUND
We’ll break John’s topic into two parts. First, military pay for work done. Second, military retirement pay.
People who earn payment for working in the military pay state income taxes in Indiana. It is not tax-free. However, Jones does point out that many people who are either active or reserve military and receive pay can claim a $5,000 deduction. This applies service in the Army, Navy, Air Force, Coast Guard, Marine Corps, Merchant Marine, Indiana Army National Guard or Indiana Air National Guard.
So what John had heard about military pay being exempt from taxes is not correct. Military income is taxed in Indiana after a $5,000 deduction.
The tax situation is different for military retirement benefits and surviving spouse benefits. The state is currently phasing out taxes on those benefits and they will be tax exempt in 2022.
In 2019, Governor Eric Holcomb signed a new law to increase the income tax deduction for military retirement and survivor’s benefits. The initial began in 2019 and then gradually increase through the 2022 tax year, when all of the benefits are deductible.
Jones explained how this gradual increase works. First, taxpayers can deduct up to $6,250 of their military pension or survivor benefits off the top. In 2019, taxpayers could deduct 25% of the amount over that $6,250. In 2020, that deduction increased to 50%. Next year, in 2021, it will be 75%. By the time taxes for 2022 come around, 100% of the military retirement benefits and survivor benefits will be deductible.
“So it’ll be just like Social Security benefits that you receive, which you do not pay taxes on,” Jones said. “The military retirement and survival spouse benefits will be the exact same thing. You will not have to pay taxes on 100% of those benefits.”
So John could be correct that the benefits might be entirely deductible this year, if someone received a very small amount. Jones said, “The benefits can be completely tax-free, even as of today, for the simple fact that if you if the benefits are actually less than…$6,250, then yes, it’s completely tax-free at that particular point.”
Jones also noted that people who might be in the position of receiving both military pay and surviving spouse benefits can claim both deductions. They would get the $5,000 income deduction, as well as the new spousal benefit deductions from that 2019 law.
The Indiana Department of Revenue has a document online that lays out the details of these deductions and other military taxes. The agency says taxpayers who want to claim the military deductions should use Schedule 2 (or Schedule C if they file a Form IT-40PNR). The information to calculate the deduction is available online.
Jones explained one of the purposes for an income tax exemption like this is to bring veterans and their skills to Indiana. “So what that does is it makes it… attractive for the veterans and survival spouses to be able to stay in Indiana, to be able to keep more money in their pockets, and actually, to be able to go out and live more comfortably and to pretty much kind of reward them for their services that they have provided for our country as well.”
So, we can verify that military pay is not entirely tax exempt in Indiana. There is a $5,000 deduction.
We can verify that military retirement pay will be tax exempt in Indiana starting with the 2022 taxes. The exemption for that kind of pay is gradually increasing over four years to reach 100%.
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