Does Washington State Tax Military Retirement?

For military retirees, understanding how state taxes impact your pension is a significant part of financial planning. Many consider relocating after military service, and state tax policies play a role in that decision. This article clarifies whether Washington State taxes military retirement pay.

Understanding Washington’s Income Tax Structure

Washington State operates under a unique tax system. A key characteristic is the absence of a personal state income tax. This means wages, salaries, and most other forms of personal income earned by residents are not subject to a state-level income tax.

This structure differs from most states in the United States, which levy a tax on individual earnings. Residents do not file a separate state income tax return each year. While there is no state income tax, it does not mean there are no taxes at all in Washington.

Tax Treatment of Military Retirement Pay

Military retirement pay is not subject to state income tax in Washington. This is a direct consequence of the state’s broader tax policy, which does not impose a personal income tax on its residents. Therefore, military retirees living in Washington do not pay state income tax on their pension benefits.

While Washington State does not tax military retirement pay, this income remains subject to federal income tax. Federal taxation of military retirement benefits applies nationwide, regardless of state policies. This state-level tax exemption makes Washington attractive for military retirees seeking to maximize their retirement income.

Other Key Taxes in Washington State

Despite the absence of a personal income tax, Washington State relies on other tax sources to fund state and local services. Sales tax is a significant component of the state’s revenue, applied to the sale of most goods and some services. The state sales tax rate is 6.5%, with local jurisdictions often adding their own rates, leading to a combined average sales tax rate that can be higher.

Property taxes are another primary source of funding, levied on real estate and collected by county governments to support local services such as schools and infrastructure. The effective property tax rate in Washington typically falls within the middle range nationally. Businesses operating within the state are also subject to the Business and Occupation (B&O) tax, which is a gross receipts tax applied to the value of products, gross income, or gross sales, depending on the business activity. This B&O tax serves as a significant business tax in lieu of a corporate income tax in Washington.