Does Indiana Tax Military Retirement?

Military retirees frequently evaluate state tax policies to determine the financial implications of their retirement location. Indiana has specific provisions concerning the taxation of military retirement income, which can significantly impact a retiree’s financial planning. This article aims to clarify how Indiana addresses military retirement pay for state income tax purposes.

Indiana’s Approach to Military Retirement Taxation

Indiana fully exempts military retired pay from state income tax. This policy became effective for tax years beginning after 2021, meaning that as of the 2022 tax year, 100% of military retirement income is exempt. This comprehensive exemption also extends to military survivor annuities, such as those received through the Survivor Benefit Plan (SBP), Reserve Component Survivor Benefit Plan (RCSBP), and Retired Serviceman’s Family Protection Plan (RSFPP).

Understanding the Exemption Criteria

The military retirement exemption in Indiana applies to various forms of military retirement income and survivor’s benefits. This includes retirement pay received from all branches of the United States Armed Forces, encompassing the Army, Navy, Air Force, Coast Guard, and Marine Corps.

Beginning January 1, 2025, the exemption explicitly extends to retirement pay from the United States Space Force, the United States Public Health Service Commissioned Corps, and the National Oceanic and Atmospheric Administration Commissioned Officer Corps. The deduction is available to the military member who earned the retirement pay and their surviving spouse.

There is no age requirement to qualify for this military retirement or survivor’s benefits deduction. It is important to differentiate this full exemption from other military tax benefits, such as the deduction for active duty military pay, which had different rules and limitations in prior years. Military disability retirement pay, received as a pension or annuity for personal injury or sickness from active service, is also not included in taxable income. This comprehensive approach ensures that qualifying military retirement income is entirely excluded from Indiana state income taxation.

Steps for Claiming the Exemption

To claim the military retirement exemption, eligible taxpayers must report it as a deduction on their Indiana state income tax return. This deduction is typically entered on Indiana Form IT-40, specifically on Schedule 2 under the “Other Deductions” section. The relevant line for this deduction is often line 11 of Schedule 2.

The amount of the military retirement income and/or survivor’s benefits deduction must be manually entered by the taxpayer. When using tax preparation software, taxpayers will generally find a specific field for “Military Retirement and/or Survivor’s Benefits Deduction” where the total exempt amount should be entered.

All income, including military retirement pay, should be reported on Form IT-40, even if a portion of it is subsequently deducted. While specific documentation is not submitted with the tax return, retaining records of military retirement income statements is important for verification purposes.