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Taxing Your Retirement: Military Retirement and Social Security Income Taxes

Nebraska has a lot of wonderful things to offer, but warm winter weather, oceanfront property and snow-capped peaks are not on the list.

But it’s not our lack of natural wonders that caused the national finance publication Kiplinger to rank Nebraska as one of the worst states for retirees. Nebraska’s inordinately high tax burden on retirees prompted our our state to be ranked as the 7th worst in the nation for retired taxpayers.

Currently, 28 states including Iowa fully exempt Social Security benefits from taxation, while an additional 9 states do not tax any personal income. This means that 37 states offer a more attractive tax environment for baby boomers and other retirees.

The income threshold for single and joint filers in Nebraska is $43,000 and $58,000, respectively. Retirees exceeding this threshold must pay state income taxes on 85 percent of their Social Security income, including retirement, survivor and disability benefits. This is particularly troubling considering the average household income for aging Nebraskans is 19 percent below the national average. Additionally, Social Security benefits are derived from earnings that have already been taxed up to 85 percent at the federal level.

The Nebraska Legislature has given some limited exemptions to military benefits: A military retiree could make a one-time election to exclude 40 percent of retirement pay from taxes for 7 years, or 15 percent of that income beginning at age 67 into perpetuity. However, sixteen states (including Iowa, Kansas and Missouri starting in 2016) are outpacing Nebraska by offering a full tax exemption of military pensions.

Offutt Air Force Base is a major economic driver for both Bellevue and the entire state. Offutt employs more than 10,000 military and civilian personnel and contributes approximately $1.3 billion to the local economy each year. However, many Offutt personnel leave Nebraska once they retire, often on the government dime. The military is literally paying these retirees to leave the state, and there are few tax incentives to keep this population from relocating.

According to the Tax Foundation, a nationally-recognized tax research organization, the majority of private-sector retirement income goes to people making less than $100,000 per year. This predominantly middle class segment of the population is less likely to retire in a state that taxes the majority of their economic livelihood.

Travis Brown, author of How Money Walks, estimates that between 1995 and 2010, Nebraska experienced a net loss of $2.3 billion in adjusted gross income due to tax migration. Brown used data from the Census Bureau and the annual Tax Foundation survey to map a clear pattern of AGI moving from high tax states to those with low or no personal income taxes. These former Nebraskans flocked to Florida, Arizona, Texas and other states with more favorable tax environments.

The state’s tax system should encourage residents to retire within its borders and not flee to a sunnier climate with lower taxes. Ultimately, the compounding effect of taxation on Social Security income, military pensions and inordinately high property taxes is overly burdensome on Nebraska’s retirees and threatens the state’s future economic stability.