Yes, New Mexico taxes military retirement pay, but retirees and their surviving spouses can exempt the first $30,000 each year from state income tax. Anything above that cap is taxed at New Mexico’s graduated individual income tax rates, which run from 1.5% to 5.9%. The exemption is now permanent after the legislature removed a scheduled 2026 expiration date.
How the $30,000 Exemption Works
Under Section 7-2-5.13 of the New Mexico statutes, an armed forces retiree or their surviving spouse may exclude up to $30,000 of military retirement pay from net income for state tax purposes.1Justia. New Mexico Statutes Section 7-2-5.13 – Exemption; Armed Forces Retirement Pay The exemption applies dollar-for-dollar against retirement pay you’d otherwise owe state income tax on. If your military retirement income is $30,000 or less, you owe New Mexico nothing on it. If it’s $50,000, you pay state tax only on the $20,000 above the cap.
The exemption was created in 2022 and originally set to expire after tax year 2026. During the 2024 session, the legislature passed Senate Bill 125, which removed the sunset and made the $30,000 exemption permanent starting January 1, 2025.2New Mexico Legislature. SB0125 Senate Bill 125 – 2024 Regular Session Before that fix, the exemption phased in gradually: $10,000 for 2022, $20,000 for 2023, and $30,000 for 2024 onward.
Who Qualifies
The statute defines an “armed forces retiree” as a former member of the United States armed forces who earned the right to separate from military service with lifetime benefits, whether through years of service or a service-connected disability.1Justia. New Mexico Statutes Section 7-2-5.13 – Exemption; Armed Forces Retirement Pay That covers retirees from every branch: Army, Navy, Air Force, Marines, Coast Guard, and Space Force. If you separated with a pension under the military retirement system, you qualify.
Surviving spouses qualify for the same $30,000 exemption on Survivor Benefit Plan payments.2New Mexico Legislature. SB0125 Senate Bill 125 – 2024 Regular Session One detail to know: under federal rules, an SBP annuity stops entirely if a surviving spouse remarries before age 55, so there would be no military retirement income left to exempt.3Defense Finance and Accounting Service. Understanding SBP, DIC and SSIA Remarriage at age 55 or later does not affect the annuity.
National Guard and Reserve members who completed enough qualifying years to earn a reserve retirement fall within the definition once they begin drawing that pension. Drill pay and annual training pay for Guard and Reserve members who haven’t yet retired are active or reserve compensation, not retirement pay, and are handled differently under state tax law.
VA Disability and Combat-Related Special Compensation
If part of your military income is VA disability compensation rather than retired pay, you don’t need the state exemption for that portion. VA disability is excluded from gross income at the federal level, so it never appears on your federal return and never flows through to your New Mexico return. The same is true of Combat-Related Special Compensation, which DFAS classifies as a tax-free entitlement.4Defense Finance and Accounting Service. Combat Related Special Compensation (CRSC)
This matters for retirees receiving a mix of taxable retired pay and tax-free VA compensation. Only the taxable retirement portion counts against the $30,000 cap. Take a retiree with $45,000 in gross military retirement income, $18,000 of which arrives as VA disability compensation. That leaves $27,000 in taxable military retirement pay, all of which fits inside the $30,000 exemption.
How to Claim the Exemption
You claim the exemption when you file your New Mexico personal income tax return (Form PIT-1). The exemption itself is entered on Form PIT-ADJ, the schedule for additions, deductions, and exemptions. Line numbers shift between tax years, so check the current-year PIT-ADJ instructions before filing. Both the form and its instructions are on the Taxation and Revenue Department’s website.5NM Taxation & Revenue Department. Personal Income Tax Forms
Enter the exemption as a positive number. If your total military retirement pay is $30,000 or less, enter the full amount. If it exceeds $30,000, enter $30,000. Keep your 1099-R and other military retirement documentation with your records. New Mexico’s filing deadline is April 15, matching the federal deadline.
Residency Rules for Active-Duty Families
Whether New Mexico taxes your military income depends on where you’re domiciled. Under the federal Servicemembers Civil Relief Act, active-duty service members don’t change their legal domicile just because orders station them in New Mexico. If you’re domiciled in another state and stationed here, your military pay isn’t subject to New Mexico income tax. The Military Spouses Residency Relief Act gives spouses a similar option: if you moved to New Mexico solely to be with your active-duty spouse, you can elect to pay state income tax to your state of domicile instead.
Once you retire and settle in New Mexico as a resident, all of your income falls under state tax rules, and the $30,000 exemption becomes your main shield on the retirement pay. In the other direction, retirement income earned by a non-resident is taxed by the retiree’s state of residence, not New Mexico, even if the service that generated the pension happened here.6Cornell Law School. New Mexico Admin Code 3.3.11.13 – Retirement Income