South Dakota Has No Income Tax on Military Pay or Retired Pay

This entry exists because its absence is misleading. A veteran comparing states searches for "South Dakota military retirement exemption", finds nothing, and can reasonably conclude the state taxes the pension. It does not. South Dakota levies no individual income tax at all, so military retired pay, National Guard and reserve drill pay, VA disability compensation, DIC and a Survivor Benefit Plan annuity are outside the state's reach without any subtraction being claimed. The practical differences from a state that grants an exemption are worth stating, because they all cut in the veteran's favour. There is no cap, so a full colonel's pension is treated the same as a corporal's. There is no age test, no minimum years of service, and no requirement to have been a resident by a particular date, all of which appear in neighbouring states' subtractions. There is no five-year or sunset limit. There is no form and no line to miss, so a veteran cannot lose the benefit by failing to claim it, which is the way exemptions are most often lost elsewhere. And because there is no state return, a nonresident who earns military pay while stationed in South Dakota has no state filing obligation from that pay. South Dakota also imposes no inheritance or estate tax; the inheritance tax was repealed by the voters effective July 1, 2001. That matters alongside the veterans home's estate claim described separately in this catalog, which is a claim by a creditor rather than a tax. What the state does levy on individuals is sales and use tax, property tax, motor fuel tax, and tobacco and alcohol excise. The sales tax reaches groceries, which is the offsetting fact a retiree on a fixed income should put next to the absent income tax. There is no veteran exemption from the state sales tax, and no veteran exemption from the four percent motor vehicle excise tax either, which is a benefit several neighbouring states do grant. The one place a service member's income does meet a South Dakota tax rule is 33A-2-6 and 33A-2-7, which keep state excise tax off merchandise sold to armed forces instrumentalities and exchanges on exclusive federal areas. That is an exemption for the outlet, not for the shopper.