Servicemembers in the U.S. Armed Forces often find themselves in unique tax circumstances due to special pay and uncommon circumstances. While not all of your military pay is taxable, some is.

It goes without saying you should always pay your taxes appropriately to avoid penalties. If you’re ever in doubt, you should always consult a licensed tax professional for assistance. To help you get started navigating what’s taxable and what’s not, including special pay during active-duty service as well as retirement pay.

Understanding Military Pay and Taxes

As previously noted, some military pay is taxable, and some isn’t. If you’re confused about which pay goes into which category, here are the things you need to keep in mind.

How Military Pay Works

Military pay comprises various components, each contributing to your overall compensation.

• Basic Pay: The basic pay rate received by military personnel serves as the foundation of their salary and does not include additional benefits or bonuses.
• Allowances: Allowances are funds provided for specific needs, such as food or housing, which enhance the compensation package for military members.
• Special and Incentive Pays: Military personnel may receive special and incentive pay in addition to their basic pay and allowances. These are compensations for specific circumstances, such as hazardous duty or critical skills.

Taxation of Military Pay

For federal income tax, most components of military pay are taxable. However, specific allowances, such as BAS (Basic Allowance for Subsistence) and BAH (Basic Allowance for Housing), are tax-exempt. States vary in their taxation policies, and some provide exemptions for military pay so stay up to date on the filing rules of the state in which you’re filing.

Additionally, military personnel still contribute to Social Security and Medicare through payroll deductions. Social Security tax is 6.2% of taxable military pay, while Medicare tax is 1.45%. We’ll cover federal and income tax in more detail below.

Do Active Duty Military Members Pay Taxes?

While active-duty military members do pay federal income tax on a significant portion of their income, there are specific allowances and tax benefits in place to recognize the challenges and expenses associated with military service.

Federal Income Tax for Active Duty Military

As an active-duty military member, you are subject to federal income tax, but there are specific considerations and provisions designed to ease the tax burden.

As mentioned above, BAS and BAH are often exempt from federal income tax obligations. By recognizing the unique aspects of military service, these essential compensation components remain tax-free.

Moreover, active-duty military personnel may benefit from special provisions and deductions. There are also valuable tax credits, such as the Earned Income Tax Credit (EITC) and deductions for unreimbursed moving expenses. Make sure you’re aware of these provisions to optimize your tax situation and potentially reduce your overall tax liability.

State Income Tax Considerations

Active-duty military members face both challenges and advantages when it comes to state income tax implications, mainly based on their residency.

Typically, servicemembers file state income taxes in their state of legal residence, even if stationed elsewhere. The Military Spouses Residency Relief Act (MSRRA) ensures that spouses do not lose or gain residency for taxation purposes during relocations.

Military income earned out of the state of legal residence is often tax-free, and some states extend tax breaks on active-duty pay earned within their borders. The specifics vary; for example, Oregon offers tax-free status for up to $6,000 of active-duty pay earned in the state.

Special Tax Considerations for Deployed Military Personnel

Deployed servicemembers face unique circumstances and, as such, are entitled to specific tax considerations.

Combat Zone Tax Exclusion

The Combat Zone Tax Exclusion (CZTE) is a provision that exempts qualifying military pay from federal income tax when earned in a designated combat zone. If you spend a single day in a combat zone, your pay for that entire month becomes tax-free. The CZTE includes re-enlistment bonuses, hazardous duty pay, and other incentives received while serving in a combat zone. It provides financial relief for deployed military personnel by excluding income earned in dangerous areas from federal taxation.

Tax-Free Benefits for Deployed Military

In addition to the CZTE, deployed military personnel may benefit from other tax-free allowances. Hostile fire pay, received when subjected to hostile fire or imminent danger, is entirely exempt from federal income tax. Imminent danger pay, granted for service in locations posing significant risks, is also tax-free. These benefits recognize the challenging circumstances faced by deployed military members and aim to alleviate financial burdens during their service.

Is Military Retirement Pay Taxed?

Once your service is over and you’ve earned your retirement, what kinds of taxes will you have to pay? Let’s take a look.

Federal Taxation of Military Retirement Pay

Military retirement pay is generally considered taxable income at the federal level. The taxation rate takes into account factors such as age, length of service, and individual circumstances. Disability and retirement pay may have different tax implications than regular retirement pay. You might also be entitled to special tax exemptions. This is why it’s essential to get help from a tax professional who understands the unique needs of retired servicemembers.

State Taxation of Military Retirement Pay

Several states impose income taxes on military retirement benefits, but the degree of taxation and available exemptions differ.

Some states, such as Colorado, Delaware, Georgia, Idaho, Kentucky, Maryland, Montana, Nebraska, North Carolina, and Utah, partially tax military retirement benefits. The specific exemptions or deductions depend on factors like age and gross income. For example, in Colorado, individuals may be eligible for an exemption of up to $24,000 of military retirement pay based on age. Similarly, Montana provides an exemption for retired pay up to $4,640 if gross income is less than $38,660.

Some other states have also taken steps to alleviate the tax burden on military retirees. In 2021, Arizona, Nebraska, North Carolina, and Utah eliminated state taxes on military retirement pay. Louisiana passed a tax exemption for military retirement pay, providing further financial relief for retirees.

Understand Your Military Pay with AAFMAA

When it comes to navigating the unique needs of military benefits, trust AAFMAA to help guide you through. We’re experts on military life. Contact us today to learn more about our Membership benefits and how we can help you.