John Mason, Certified Financial PlannerTM
Ben Raikes, Certified Financial PlannerTM
It’s official (ceremonial signing on June 21), a portion of Military Retirement will now be tax-free in the Commonwealth of Virginia. Virginia lawmakers and the Governor approved and signed the 2022 budget deal that makes up to $40,000 of military pensions tax-free in Virginia. The tax-free retirement benefits will be phased in over four years beginning in 2022 and concluding in 2024.
2022- Up to $10,000 of military pension will be excluded from Virginia Taxable Income
2023- Up to $20,000 of military pension will be excluded from Virginia Taxable Income
2024- Up to $30,000 of military pension will be excluded from Virginia Taxable Income
2025- Up to $40,000 of military pension will be excluded from Virginia Taxable Income
VA Disability Benefits are tax-free at both the federal and state levels. Many retirees receive concurrent benefit checks from the Veterans Administration and the Defense Finance and Accounting Services. If a retiree has a 50% or higher disability rating, they receive a VA disability benefit payment in addition to their full pension. For those retirees with less than a 50% rating, a portion of their retired pay is paid by the Veterans Administration (tax-free), but the total gross dollars received equal the pension amount. The example below is for illustration purposes and does not reflect an actual scenario.
|
0% VA Disability Rating |
10% VA Disability Rating |
50% VA Disability Rating |
DFAS |
$1,000 |
$900 |
$1,000 |
VA |
$0 |
$100 |
$500 |
Total |
$1,000 |
$1,000 |
$1,500 |
Planning
The new exclusion on military retirement income for those age 55 and older will save military retirees up to $2,300 in Virginia taxes when the full $40,000 is excluded from Virginia Taxable Income. Retirees may still need to have Virginia taxes withheld on their military pension if the retiree or retiree’s spouse have additional sources of Virginia taxable income.
If you received a small refund or owed a small amount on your Virginia tax return, we aren’t recommending withholding adjustments in 2022. However, as the exclusion continues to grow, adjustments will likely need to be made to Virginia withholding through the DFAS website. Luckily, the DFAS website is user friendly and allows for retirees to pick a specific dollar amount for monthly state tax withholding.
We almost always recommend that military retirees elect FULL survivor benefits at retirement. The cost is 6.5% and it drops to zero after a retiree has paid in for 30 years and attained age 70. Survivor benefit payments are eligible to be excluded from Virginia income.
In addition to the exclusion of Military Retirement and Survivor Benefit income, the new budget also increases the standard deduction (see below) and provides rebate checks of $250 for single filers and $500 for married.
|
2021 |
New |
Single |
$4,500 |
$8,000 |
Married |
$9,000 |
$16,000 |
The exclusion of military retirement from Virginia taxable income will increase retirees net disposable income by reducing their Virginia tax liability. There may be additional benefits but those will be determined when we see exactly how this exclusion is incorporated into the tax code. We believe the exclusion of military retirement income will be a positive for Virginia and that it will encourage more Veterans to call Virginia their forever home.