Does Minnesota Tax Military Retirement?
As a military retiree, it’s essential to understand the tax implications of your retirement benefits in Minnesota. In this article, we’ll provide a comprehensive overview of whether Minnesota taxes military retirement and what you need to know to navigate the tax system.
Does Minnesota Tax Military Retirement?
Short Answer: Yes, Minnesota does tax military retirement benefits.
Long Answer: Minnesota taxes military retirement benefits as ordinary income, which means they are subject to state income tax. However, the state offers some tax benefits and exemptions that can help reduce the tax burden.
Types of Military Retirement Benefits
Before we dive into the tax implications, it’s essential to understand the different types of military retirement benefits:
- Basic Allowance for Housing (BAH): A tax-free allowance provided to military personnel to cover housing expenses.
- Basic Allowance for Subsistence (BAS): A tax-free allowance provided to military personnel to cover food expenses.
- Combat Zone Tax Exclusion: A tax exemption for military personnel serving in combat zones.
- Military Retirement Pay: A taxable benefit paid to military retirees for their service.
Minnesota Taxation of Military Retirement Benefits
Minnesota taxes military retirement pay as ordinary income, which means it’s subject to state income tax. The state uses the federal adjusted gross income (AGI) as the basis for calculating state income tax.
Tax Exemptions and Credits
While Minnesota taxes military retirement pay, there are some tax exemptions and credits that can help reduce the tax burden:
- Military Retirement Exemption: Minnesota offers a $6,000 exemption for military retirement pay, which can reduce the amount of taxable income.
- Military Disability Compensation Exemption: Minnesota exempts military disability compensation from state income tax.
- Military Survivor Benefits Exemption: Minnesota exempts survivor benefits paid to the spouse or dependent children of a deceased military service member from state income tax.
- Military Education Benefits Credit: Minnesota offers a credit of up to $2,500 for military education benefits, such as the GI Bill.
Tax Planning Strategies
To minimize the tax impact of military retirement benefits in Minnesota, consider the following strategies:
- Contribute to a Tax-Deferred Retirement Account: Contribute to a tax-deferred retirement account, such as a 401(k) or IRA, to reduce taxable income.
- Take Advantage of Tax Credits: Claim the Military Retirement Exemption, Military Disability Compensation Exemption, and Military Survivor Benefits Exemption to reduce taxable income.
- Consult a Tax Professional: Consult a tax professional to ensure you’re taking advantage of all available tax credits and exemptions.
Comparison to Other States
Minnesota is one of the few states that taxes military retirement pay. Here’s a comparison to other states:
| State | Taxation of Military Retirement Pay |
|---|---|
| Minnesota | Yes |
| Wisconsin | No |
| Iowa | No |
| Illinois | Yes |
| Michigan | Yes |
Conclusion
In conclusion, Minnesota does tax military retirement benefits, but there are some tax exemptions and credits available to reduce the tax burden. By understanding the types of military retirement benefits, tax implications, and tax planning strategies, military retirees can minimize their tax liability and make the most of their benefits.
