Do Active Military Members Pay Taxes on Their Income?
Understand how active military members navigate their unique income tax obligations, from standard rules to specialized benefits.
Active military members generally pay taxes on their income, similar to civilians, but their unique service conditions come with distinct tax rules, exemptions, and benefits. Their tax obligations can differ significantly based on where they serve and the types of income they receive.
Federal Income Tax Considerations
Most military income is subject to federal income tax, including basic pay, special pay, and bonuses. This includes active duty pay, drill pay, reserve training, and back wages. Certain special pays, such as aviation career incentives, foreign duty pay, hardship duty pay, and reenlistment bonuses, are also typically included in taxable income.
Conversely, many military allowances are not subject to federal income tax. These typically include the Basic Allowance for Housing (BAH), Basic Allowance for Subsistence (BAS), and Overseas Housing Allowance (OHA). Allowances for moving household goods, temporary lodging, and certain travel are also usually excludable from gross income. These non-taxable allowances can significantly reduce a service member’s overall taxable income.
A notable federal tax exclusion is the Combat Zone Tax Exclusion (CZTE), authorized under Internal Revenue Code Section 112. This exclusion allows all income earned by enlisted personnel and warrant officers while serving in a designated combat zone to be exempt from federal income tax. For commissioned officers, the exclusion is limited to the highest rate of enlisted pay plus any hostile fire or imminent danger pay received for service in the combat zone. This exclusion applies to income earned during any month, or part of a month, spent in a combat zone, or while hospitalized due to injuries incurred in a combat zone, for up to two years after combatant activities cease.
Federal tax returns, such as Form 1040, are generally required for active military members. Taxable military income is reported in Box 1 of Form W-2. The IRS provides resources like Publication 3, “Armed Forces’ Tax Guide,” and offers free tax preparation services through programs like MilTax and Volunteer Income Tax Assistance (VITA) on military bases.
State and Local Tax Rules
State and local tax rules for active military members add another layer of complexity, primarily due to the concept of domicile. A service member’s domicile is their legal residence, which generally remains the same regardless of where they are stationed. This domicile determines which state can levy income tax on their military earnings. Many states offer specific exemptions or benefits for military income. Some states may exempt all military pay, while others might exempt a portion or offer specific deductions.
Even if a service member is stationed in a different state, their military income is typically taxed only by their state of domicile. For military spouses, the Servicemembers Civil Relief Act (SCRA) and Military Spouses Residency Relief Act (MSRRA) allow spouses to retain their domicile for tax purposes, often avoiding income tax in the state where they are stationed if it differs from their domicile.
Local taxes, such as sales tax and property taxes, generally apply to active military members in the same way they apply to civilians. Sales tax is collected on purchases of goods and services, regardless of military status or domicile. Property taxes, levied on real estate, are typically owed to the local jurisdiction where the property is located. However, some states may offer property tax exemptions for veterans or active-duty service members, often tied to disability status or specific service criteria.
Important Tax Benefits and Exclusions
Active military members have access to other significant tax benefits and exclusions that can reduce their overall tax burden. One such benefit involves unreimbursed moving expenses. If a move is due to a permanent change of station (PCS), service members may be able to deduct certain unreimbursed moving costs on Form 3903.
Special rules apply to the home sale exclusion for military members. The typical two-year residency requirement for excluding gain from the sale of a primary residence can be suspended for up to ten years if the service member is on qualified official extended duty. This allows military members more flexibility to sell their homes without incurring capital gains tax.
Extensions for filing tax returns are also available for service members. Those serving in a combat zone or in contingency operations outside the U.S. can postpone most tax deadlines. Service members stationed outside the United States and Puerto Rico also qualify for an automatic two-month extension for federal tax filings. While these extensions grant more time to file, any taxes due still accrue interest from the original deadline.
Military members can also consider special rules for Roth IRA contributions. While combat pay is tax-free, it can be included as earned income for purposes of contributing to a Roth IRA, allowing for tax-free growth and withdrawals in retirement. Additionally, certain death gratuity payments and survivor benefits are generally tax-free. Educational benefits, such as those provided by the GI Bill, are also typically excluded from taxable income. Low and moderate-income service members may also use their nontaxable combat pay to calculate the Earned Income Tax Credit (EITC), potentially leading to a larger refund.