The Federal government does not exempt public service pensions including military.
Any 1099-R income that is received is taxable at the Federal level.
Let me ask you a few more questions, please.
From what source is the pay? is it coming form an annuity and insurance company or form your retirement plan?
What is your retirment plan name?
On the form 1099-R what blocks are filled out, include any blocks that have check marks, code letter or numbers and dollar amounts. block by block.?
The IRS states that unless this income is specificaly excluded by law, it is still taxable even if the it is not taxed by the state.
However if you are still working you can take as a business expenses certain impairmetn related expenses. Scroll in the document represeneted at the link, to impairment related expenses.
I am really sorry for that. I think police officers do as much for protecting us as the military.