Nebraska Taxation of Military Retirement Pay

Beginning in tax year 2022, Nebraska allows an exclusion of 100% of military retirement pay from Nebraska taxable income. This change is the result of LB 387, passed by the 2021 Nebraska Legislature. Previously, a partial exclusion was available beginning in tax year 2015, but only if an election to exclude income was timely filed.

Military retirement pay is defined as retirement benefits that are periodic payments attributable to service in the uniformed services of the U.S. for personal services performed by an individual prior to his or her retirement. It includes military retirement benefits reported to the individual on Form 1099-R from the United States Department of Defense or the United States Office of Personnel Management.

Military retirement pay does not include annuity payments to a spouse, former spouse, or child that are based on an individual’s military services, nor does it include payments received by a former spouse of a retired military member under a final decree of divorce, dissolution, annulment, or legal separation or a court-ordered, ratified, or approved property settlement pursuant to a decree dividing military retirement pay.

Law in Effect for Tax Years 2015-2021 

For tax years 2015 through 2021, an individual may make a one-time election to exclude a portion of military retirement pay from Nebraska taxable income. The election must be made within two calendar years from the date of retirement from the military. The election options are:

1. Exclude 40% of military retirement pay for seven consecutive tax years beginning with the year the election is made; OR

2. Exclude 15% of military retirement pay for all tax years beginning with the year in which he or she turns sixty-seven years old.

The election is made on Form 1040N-MIL. 

It is important to note that the election MUST be made within two calendar years of retirement from the military, regardless of your state of residency at the time of retirement. If you were a nonresident of Nebraska at the time of retirement, then later moved to Nebraska, you still must have made the election within two calendar years of retiring from the military. Also, the two-year election deadline is based on the date of retirement, not the date when you begin receiving military retirement pay.

Failure to make a timely election will result in the full amount of military retirement pay being included in Nebraska's taxable income (to the extent included in federal adjusted gross income). 

New Law Beginning Tax Year 2022 

Beginning with tax year 2022, 100% of military retirement pay will be excluded from Nebraska taxable income (to the extent included in federal adjusted gross income). No formal election will be required, and you will no longer be limited by an election filed (or not filed) under the previous law.

To learn more about Nebraska’s taxation of military retirement pay, please contact us.