Virginia's $40,000 Military Retirement Tax Break
Virginia lets military retirees subtract up to $40,000 in retirement pay from state taxable income. Here is who qualifies, what is excluded, and the math.
Virginia military retirees have been able to subtract a portion of their retirement pay from state taxable income since 2022. The subtraction started at $10,000, climbed to $20,000, then $30,000, and for tax year 2025 and beyond, it reaches $40,000. That is a real tax cut worth up to $2,300 per year for a typical O-5 retiree, and most eligible veterans in Hampton Roads are either unaware of it or confused by outdated information on the Virginia Tax FAQ page.
What Does the Law Actually Say?
The subtraction is codified in Va. Code Section 58.1-322.02, subdivision 18. It allows Virginia residents to subtract qualifying “military benefits” from their federal adjusted gross income when computing Virginia taxable income.
For tax years beginning on or after January 1, 2025, the maximum subtraction is $40,000. There is no income phase-out. If you receive $40,000 or more in qualifying military benefits, you subtract the full $40,000 regardless of your other income.
Who Qualifies?
To claim the subtraction, you must:
- Be a Virginia resident filing a Virginia individual income tax return.
- Receive qualifying military benefits as defined by the statute.
That is it. There is no minimum age requirement. The original 2022 legislation included an age-55 requirement, but the General Assembly removed it effective tax year 2024. If you retired at 38 after 20 years of service, you qualify now.
Important warning: The Virginia Tax FAQ has historically contained stale language referencing the age-55 requirement. Always cite the Code itself, not the FAQ.
What Counts as “Military Benefits”?
The statute defines military benefits broadly:
| Qualifying Income | Included? | Source |
|---|---|---|
| Military retired pay (DFAS) | Yes | Va. Code 58.1-322.02(18) |
| Survivor Benefit Plan (SBP) payments | Yes | Statute subdivision (iv) |
| Qualified military benefits under IRC Section 134 | Yes | Statute subdivision (ii) |
| Congressional Medal of Honor recipients | Full exemption (no cap) | Statute subdivision (a) |
| TSP distributions | No | Virginia Tax FAQ |
| VA disability compensation | Already tax-free | 26 USC 104(a)(4) |
| Defense contractor W-2 income | No | Not military retirement |
| CRDP (restored to retired pay) | Yes (it is retired pay) | DFAS |
| CRSC payments | Already tax-free | DFAS |
The most common mistake we see: retirees assuming their TSP withdrawals qualify. They do not. TSP distributions are retirement plan income, not military retirement pay. If you are drawing $3,000 per month from your military pension and $2,000 per month from TSP, only the pension qualifies for the subtraction.
The Math for an O-5 Retiree
Consider a retired O-5 (Lieutenant Commander/Lieutenant Colonel) with 20 years of service receiving retired pay of approximately $4,594 per month based on 2026 military pay tables.
| Item | Annual Amount |
|---|---|
| Military retired pay | $55,128 |
| Virginia subtraction (capped) | ($40,000) |
| Taxable retired pay for VA purposes | $15,128 |
| Virginia tax on $40,000 at 5.75% marginal rate | $2,300 saved |
Without the subtraction, the full $55,128 flows through to Virginia taxable income. With it, only $15,128 does. At Virginia’s top marginal rate of 5.75%, the subtraction saves $2,300 per year.
Over a 20-year retirement window in Virginia, that compounds to $46,000 in nominal state tax savings before considering any COLA adjustments to retired pay.
For a higher-ranking retiree, such as an O-6 with 24 years, retired pay exceeds $70,000 annually. The $40,000 subtraction still saves the same $2,300, but more income remains exposed to Virginia tax.
What About the Full Exemption for 2026?
Virginia’s General Assembly considered HB2524 during the 2025 session, which would remove the $40,000 cap entirely for tax years beginning January 1, 2026. If enacted, military retirees would subtract their entire retirement pay from Virginia taxable income, effectively making Virginia a zero-tax state for military pensions.
As of April 2026, we believe taxpayers should plan around the existing $40,000 cap for their 2025 returns (due April 15, 2026) and monitor the legislative status of HB2524 for their 2026 returns. The Virginia Legislative Information System tracks bill status in real time.
How to Claim the Subtraction
The subtraction is claimed on Virginia Form 760, Schedule ADJ, Line 5. You will need:
- Your 1099-R from DFAS showing military retired pay
- The distribution code in Box 7 (typically code 7 for normal retirement distributions)
- Separate identification of military retired pay from any TSP or other retirement plan distributions
If you use tax software, most Virginia-compatible programs now include the military benefits subtraction as a standard deduction item. If you file with a CPA or Enrolled Agent, confirm they are applying it.
Virginia vs. Competitor States
Virginia’s $40,000 subtraction is meaningful, but it is not a full exemption. Several states where military retirees relocate offer complete exclusions:
| State | Military Retirement Tax Treatment |
|---|---|
| Virginia | Subtract up to $40,000 (2025+) |
| Florida | No state income tax |
| Texas | No state income tax |
| North Carolina | Full exemption (5+ years service) |
| Maryland | Subtract up to $12,500 (under 55) |
For retirees considering a Virginia-to-Florida move, the math changes. Florida has no state income tax at all, which means the entire pension plus TSP distributions plus any defense contractor W-2 income escapes state tax. Virginia’s subtraction only covers $40,000 of pension income.
That said, domicile decisions involve more than taxes. Property tax rates, homestead protections, TRICARE network access, proximity to military medical facilities, and family considerations all factor in. In our view, making a domicile change purely for $2,300 in annual state tax savings rarely justifies the disruption.
Related reading:
- CRDP vs. CRSC: Which Pays More After Taxes?
- What Is a Fiduciary Financial Advisor?
- Roth vs. Traditional IRA: Which Is Right for You?
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