Election to Exclude Military Retirement Pay from Income Tax
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Neb. Rev. Stat. § 77-2716(14) allows an individual who retires from the uniformed services of the U.S. on or after July 18, 2012 to make a one-time election to exclude from Nebraska taxable income a portion of his or her income received as a military retirement benefit that is included in federal adjusted gross income (AGI) for tax years beginning on or after January 1, 2015.
An individual must make the election on or after July 18, 2014 and within two years after his or her retirement from the uniformed services, even if he or she does not begin receiving military retirement benefits immediately upon retirement. The individual may elect:
- Option 1: To exclude 40% of his or her military retirement benefit income for seven consecutive taxable years, beginning with the year in which the election is made; or
- Option 2: To exclude 15% of his or her military retirement benefit income for all taxable years, beginning with the year in which he or she turns 67 years of age.
Once an election is made, it cannot be changed.
A "military retirement benefit" 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.”
Military retirement benefits (for purposes of the election) do not include annuity payments to a spouse, former spouse, or child that are based on an individual’s military service; nor do they 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.
The Election is Time Sensitive
Beginning July 18, 2014, an individual may elect to exclude a portion of his or her military retirement benefit from Nebraska taxable income. Although the election may be made beginning July 18, 2014, the exclusion is not available until tax year 2015.
An individual who retired from the uniformed services before July 18, 2012, or who fails to make the election within two years of his/her retirement date is not eligible for the exclusion.
Below are examples of retirement dates that will be eligible for the exclusion and required dates to make the election.
Retirement Date shown on your: DD Form 214; DD Form 215; DD Form 363; or NGB Form 22
Election must be mailed (U.S. Postal Service Postmark) no later than
July 18, 2012
July 18, 2014
July 19, 2012
July 19, 2014
August 17, 2012
August 17, 2014
January 1, 2013
January 1, 2015
Making the Election
An individual who retires from the uniformed services of the U.S. on or after July 18, 2012, may make the election to exclude a portion of his or her military retirement benefit by filing an Election to Exclude Military Retirement Benefits From Nebraska Taxable Income, Form 1040N-MIL with the Nebraska Department of Revenue (Department), within two years after the retirement date shown on the individual’s official documentation, such as a DD Form 214, Discharge Papers and Separation Documents; DD Form 215, Correction to DD Form 214 Certificate of Release or Discharge from Active Duty; DD Form 363, Certificate of Retirement; NGB Form 22, National Guard Report of Separation and Record of Service; or official retirement orders.
If both spouses retire from the uniformed services of the U.S., each may make his or her own election to exclude a portion of his or her military retirement benefit. As long as each election is made within two years from the individual’s retirement date, the elections may differ as to when they are made and which option is selected.
Applicable Tax Years
For tax years beginning on or after January 1, 2015, an individual will be able to exclude a portion of his or her military retirement benefit on the Nebraska Individual Income Tax Return, Form 1040N.
Note: An individual must make the election within two years of his or her retirement date.
What is Excludable?
An individual may elect to exclude a portion of his or her military retirement benefit only to the extent it is included in the individual’s federal AGI and attributable to the individual’s service in the uniformed services of the U.S.
Limitation on 40% Exclusion
The law provides that the exclusion of 40% of an individual’s military retirement benefit begins in the year in which the election is made. An individual who retired in 2012 must make the election in 2014 and will only receive the exclusion for six consecutive years due to the tax year 2015 start date for this exclusion. An individual who makes the 40% election in 2015 or after, will receive the exclusion for the full seven consecutive years.
An individual will have to carefully plan when to make the election in order to maximize the exclusion period while still ensuring that the election is made within the required two years from the date of retirement.
An individual who retires from the uniformed services of the U.S., but who does not begin receiving military retirement benefits immediately upon retirement, still must make the election to exclude a portion of his or her military retirement benefits within two years after his or her retirement date. An individual who elects to exclude 40% of his or her military retirement benefits may lose one or more years of the exclusion because he or she is not receiving military retirement benefits in one or more of the seven consecutive years following the election.