As tax regulations change, there will also be changes to your base pay, bonuses, and allowances as a servicemember. The key is understanding what part of your income is taxed and what is not.
How to Prepare for Tax Season
Before you start preparing your tax return, gather the information and documents you’ll likely need:
- Military ID
- Social Security Numbers (for each family member claimed)
- Wage and earning statements such as a W-2, W-2G or 1099-R
- Childcare cost information
- Investment income documentation
- Receipts for charitable donations
- Receipts for deductible expenses like reasonable previously un-reimbursed moving expenses
- Bank routing and account numbers for direct deposit
- Last year’s tax returns
You should also take a look at the following military tax benefits and make sure you have all the documents you need to qualify.
Active Duty Military Tax Benefits
You provide a valuable service to your country. See which military tax advantages, including deductions and exemptions, you should be aware of when filing this season.
Household Goods Shipments
The Household Goods Shipments (HHG) allowance covers the cost of moving your personal belongings and household items during a military relocation. The HHG is tax-exempt to ease the financial burden associated with moving by excluding the value of shipped household goods from your taxable income. This exemption recognizes the unique demands of military life, acknowledging that frequent relocations are part of your service.
Combat Zone Pay
Servicemembers deployed to a combat zone receive tax-free income (Combat Zone Tax Exemption, or CZTE), covering base pay, imminent danger pay, hostile fire pay, bonuses, accrued leave pay, and student loan repayments. Enlisted soldiers and warrant officers benefit from a full tax exemption on their entire pay. However, officers whose income exceeds the summation of their base pay plus their flight pay beyond the current maximum enlisted pay amount will need to pay taxes on that income overage.
In addition to these tax benefits, if you’re deployed to a combat zone, you may qualify for a 180-day extension to file your taxes.
Thrift Savings Plans (TSP) Tax Exemptions
In tax-exempt combat zones, both Roth TSP and Traditional TSP provide tax advantages for active-duty military personnel. Contributions to Roth TSP in these zones are made with after-tax dollars, ensuring that withdrawals, including earnings, are entirely tax-free when certain conditions are met.
On the other hand, contributions to Traditional TSP in tax-exempt combat zones are tax-deferred, meaning they’re deducted from pre-tax income. While contributions are not taxed during the initial investment, withdrawals in retirement are subject to income tax. This allows military members to defer taxation to a potentially lower income bracket in the future.
Understanding these distinctions lets you make informed decisions about your retirement savings strategy based on your deployment location and the associated tax implications.
Basic Allowance for Housing & Subsistence
Both Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are non-taxable components of military compensation. BAH is designed to cover housing costs and varies based on factors such as location, rank, and dependency status. Since BAH provides support for housing needs, it’s not considered taxable income, offering servicemembers financial relief in meeting their housing expenses.
Similarly, BAS, which helps offset the cost of meals, is also non-taxable. BAS rates are standardized and not influenced by individual circumstances. This allowance ensures servicemembers have the means to afford meals without incurring additional tax liabilities.
Family Separation Allowance
Family Separation Allowance (FSA) is a financial benefit provided to military servicemembers who endure prolonged separations from their dependents when fulfilling their duty requirements. The FSA is not taxable income. If you receive FSA during challenging periods of family separation, you won’t have to worry about it being taxed alongside other income.
Uniforms
The expenses associated with acquiring and maintaining your uniforms can be eligible for deduction. This recognizes the financial commitment servicemembers make to procure and keep up the uniforms required for duty. Note that any allowances received specifically for covering these costs must be subtracted from the total deduction amount.
Dislocation
Dislocation Allowance (DLA) is a tax-free cash allowance specifically crafted to provide partial reimbursement to servicemembers for expenses incurred during relocations, such as Permanent Change of Station (PCS), evacuations, or other government-ordered housing moves. DLA, typically ranging from $1,000 to $5,000 based on pay grade and dependency status, reduces the financial burden associated with relocation.
Family Subsistence Supplemental Allowance
Another non-taxable allowance is any Family Subsistence Supplemental Allowance (FSSA) you might receive. The FSSA is a financial support program for military families facing difficulty meeting their basic food needs.
Interest on Life Insurance
Interest accrued on life insurance, as detailed in policies such as AAFMAA’s Value-Added Whole Life and Wealth Builder Life Insurance, is not taxable. The interest earned on the cash value of these policies, dictated by the crediting rate, is directed toward covering policy expenses and remains non-taxable. When the policyholder passes away, beneficiaries typically do not incur taxes on the death benefit, as the IRS generally does not tax these proceeds in most cases.
However, if beneficiaries opt to leave the death benefit with the insurance provider and earn interest, the interest may be taxable income, reported on Form 1099, if it exceeds $600. Cashing a whole-life policy may result in taxable income, with the government taxing the amount greater than the premiums paid. Policy loans, exchanges, and life insurance proceeds used for Long-Term Care Settlements generally do not incur taxes, providing tax advantages in specific circumstances.
Tax-Exempt Active Duty Income
Many types of Active Duty income is tax exempt, including:
- Combat Pay
- Disability Pay
- Death Allowances
- Certain Educational Expenses for Dependents
- Basic Allowance for Housing
- Basic Allowance for Subsistence
- Overseas Housing Allowance
- Travel Allowances
- In-Kind Military Benefits
- Group Term Life Insurance
- Professional Education
- Survivor and retirement protection plan premiums
- Uniform allowances
Taxable Active Duty Income
Not all active-duty income is tax-exempt. You’ll still have to pay taxes on the following types of pay:
- Base Pay
- Hazardous Duty Pay
- Special Duty Assignment Pay
- Hardship Duty Pay
- Flight Pay
- Sea Duty Pay
- Submarine Duty Pay
- Dive Duty Pay
- Imminent Danger Pay
- Hostile Fire Pay
- Bonuses
- Pay for Accrued Leave
- Student Loan Repayments
Refer to your W-2 for more information on taxable vs. tax-exempt pay.
Non-Active Duty & Veteran Military Tax Benefits
These Veteran benefits are also tax-free:
AAFMAA Helps Servicemembers Like You
AAFMAA is here to help you understand and capitalize on all the tax benefits available to you. Contact us today to learn more about AAFMAA Membership benefits.
This article was originally published March 30, 2022.