Military Tax Break for Nebraska

Nebraska offers a wonderful tax break opportunity for retired military members, and is one we commonly use with clients of our Omaha and Lincoln financial advisors.
Military retirees may be eligible to reduce Nebraska income taxes on their military retirement benefits by filing Form 1040N-MIL.
This tax break is available for retired military members who served active duty, in the National Guard, or as Reservists. For families where both spouses are military members, a Form 1040N-MIL must be filed for each military retiree. Also important to note, Form 1040N-MIL must be filed within two years after the date of separation.

How much can military retirees save on Nebraska taxes?

There are two available options:
  • Option 1: Allows the exclusion from Nebraska taxes of 40% of the military retirement benefit included in federal income. However, this tax break is only available for seven consecutive taxable years, beginning the year of the election; or
  • Option 2: Allows the exclusion from Nebraska tax of 15% of the military retirement benefit included in federal income for all taxable years, beginning with the year in which the retired service member turns 67 years of age.

Making the election

Because Nebraska does not allow changes to the 1040N-MIL, a mistake in making the election could be costly. Above all, filing the tax break election within the two year period is essential. Once the two year period after the date of separation has passed, no election is available.
Consequently, careful planning is required to choose the best option for your retirement situation.
For example, if you are planning to move to another state later in retirement, option 2 might not be advantageous. On the other hand, a separated service member who will not be receiving military retirement benefits until a later date might not see any benefits using option 1.
The timing of the election along with your other factors of retirement income tax timing (consider the tax brackets you might face as the combination of things like Social Security, this pension, required IRA withdrawals, among other factors) along with the date at which the military retirement benefits will begin are factors to consider in optimizing and obtaining this benefit.

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Author: Rebecca A. Barnes, EA

Rebecca is a tax and financial planning practitioner with Callahan Financial Planning Company, serving clients in San Francisco, Mill Valley, and San Rafael, CA and Omaha and Lincoln, NE.