Does Virginia Tax Military Retirement? Subtraction and Age Deduction

Virginia does tax military retirement pay, but only lightly. Residents can subtract up to $40,000 of military retirement income from their Virginia taxable income for the 2025 tax year and beyond, which shields most or all of a typical pension from the state’s 5.75% top rate.¹ There is no age limit and no income cap on who can claim it. If your pension is $40,000 or less, Virginia effectively taxes none of it.

How the Subtraction Works

Virginia starts its tax calculation with your federal adjusted gross income. Because military retirement pay is included in federal AGI, it lands on your Virginia return automatically. The Military Benefits Subtraction then removes up to $40,000 of that income before Virginia applies its rates.¹ It is a subtraction, not a credit, so it reduces the income Virginia taxes rather than reducing your final bill dollar-for-dollar.

The $40,000 cap is the endpoint of a phase-in the General Assembly began in 2022. Prior years used lower limits, but the full amount is available for 2025 returns filed in 2026.²

Two things make the Virginia subtraction unusually generous. There is no income phase-out, so a retiree with $200,000 of total income qualifies for the same $40,000 subtraction as one with $50,000. And the original age-55 requirement was removed, so retirees who separate after 20 years and start drawing a pension in their 40s qualify from day one.²

What It Saves You

Virginia’s top marginal rate of 5.75% starts at just $17,000 of taxable income, so nearly every dollar of a military pension sits in that bracket. Multiply your subtraction by 0.0575 to see the savings. Using the full $40,000 cuts your Virginia tax bill by up to $2,300 a year. A retiree with a $25,000 pension who subtracts the entire amount saves about $1,438.

Doing the Math

Compare your eligible military retirement income to the $40,000 cap and subtract whichever is smaller. If your pension is $35,000, you subtract the whole $35,000. If it is $55,000, you subtract $40,000 and pay Virginia tax on the remaining $15,000.¹

On a joint return, each spouse figures the subtraction independently. If one spouse receives $45,000 and the other receives $18,000, the couple subtracts $40,000 plus $18,000, or $58,000 combined.

What Income Qualifies

Three categories of military income are eligible:

Military retirement pay for service in the U.S. Armed Forces.
Survivor Benefit Plan annuity payments to a surviving spouse.
Qualified military benefits under Section 134 of the Internal Revenue Code, to the extent they are included in federal AGI.

You must file as a Virginia resident or part-year resident, and the income must already be included in your federal AGI. If a benefit is excluded federally, there is nothing at the state level to subtract.¹

One important boundary: Thrift Savings Plan withdrawals do not qualify, even though the contributions were made during military service. Virginia treats TSP distributions as a separate class of retirement income, fully taxable unless another subtraction reaches them.¹

Disability Pay, CRDP, and CRSC

Retirees often receive a mix of retirement pay and disability compensation, and each type is taxed differently. This is where filers most often get the subtraction wrong.

VA Disability Compensation

Disability compensation from the Department of Veterans Affairs is tax-free at both the federal and state level.³ It never enters federal AGI, so it never reaches your Virginia return and cannot be subtracted. It is already fully sheltered.¹

Concurrent Retirement and Disability Pay

CRDP goes to retirees with a VA disability rating of 50% or higher and lets them collect full retirement pay and VA disability without the traditional offset. CRDP is taxed like ordinary retirement pay and appears on your 1099-R.⁴ Because it is in federal AGI, it counts as eligible military retirement pay and can be included in the $40,000 subtraction.

Combat-Related Special Compensation

CRSC is different. It compensates retirees whose disabilities are combat-related, and it is exempt from federal income tax under 26 U.S.C. § 104.⁵⁶ Because it is not in federal AGI, it does not appear on your Virginia return and cannot be subtracted. It is already tax-free.

If you receive both taxable retirement pay and nontaxable CRSC, only the taxable portion shown on your 1099-R counts toward the $40,000 cap. DFAS breaks out the taxable and nontaxable amounts on that form, and the split controls how much of the Virginia subtraction you can actually use.

Survivor Benefits

A surviving spouse receiving Survivor Benefit Plan payments qualifies for the same $40,000 subtraction that the retiree would have. SBP income is included in federal AGI and is expressly listed as an eligible military benefit for Virginia purposes.¹

Dependency and Indemnity Compensation from the VA is a separate benefit and is tax-free at every level.³ A surviving spouse who receives both SBP and DIC subtracts only the taxable SBP amount. The DIC requires nothing on the return.

Claiming the Subtraction on Your Return

The subtraction is not entered directly on Form 760. You report it on Schedule ADJ using subtraction code 60, and the total from Schedule ADJ then flows to Line 7 of Form 760.⁷ Electronic filing software will typically prompt you for military retirement income and apply the cap automatically. On paper, attach Schedule ADJ to the return. Keep your DFAS 1099-R; it is the primary record documenting the taxable retirement pay behind your subtraction.

If you want to avoid overpaying during the year, you can adjust Virginia withholding on your pension through the DFAS myPay portal under State Withholding.⁸ Retirees whose pensions fall at or below $40,000 often reduce or stop Virginia withholding entirely, since the subtraction will erase the tax anyway.

Combining the Subtraction With the Age Deduction

Virginia offers a separate age deduction for taxpayers 65 and older, and you can claim it in addition to the Military Benefits Subtraction as long as you qualify for each on its own.¹ For retirees whose pensions exceed the $40,000 cap, or who have significant TSP or civilian retirement income the military subtraction cannot touch, the age deduction can reduce what remains. It applies to qualifying income generally, not just military pay, so it reaches parts of your retirement picture that the military subtraction leaves behind.

1
Virginia Department of Taxation. Military Benefits Subtraction FAQ
2
Virginia Legislative Information System. Income Tax Subtraction for Military Benefits
3
Internal Revenue Service. Veterans Tax Information and Services
4
Defense Finance and Accounting Service. Combat-Related Special Compensation (CRSC) and Concurrent Retirement and Disability Pay (CRDP)
5
Department of Defense. Combat-Related Special Compensation Guidance
6
Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness
7
Virginia Department of Taxation. 2025 Form 760 Instructions
8
Defense Finance and Accounting Service. How to Start, Stop or Change State Income Tax Withholding