Is Military Base Pay Taxed? Federal and State Tax Rules
Understand the complex tax rules for military base pay and other compensation, covering federal, state, and special exclusions.
Military base pay forms the foundation of a service member’s income. This compensation is generally subject to taxation, much like wages earned in civilian employment. Understanding how federal and state tax rules apply to military pay is important for service members and their families.
Federal Taxation of Base Pay
Military base pay, determined by rank and years of service, is fully subject to federal income tax, Social Security tax, and Medicare tax. It is treated similarly to regular taxable wages for civilians.
The Internal Revenue Service (IRS) requires that base pay be reported as taxable income. Service members receive a Form W-2, Wage and Tax Statement, at the end of each year. Box 1 of this form reports the total federal taxable wages, which includes base pay.
Base pay is considered earned income and contributes to a service member’s adjusted gross income. It is factored into calculations for tax deductions, credits, and overall tax liability. Standard withholding rules apply to base pay throughout the year.
Federal Taxation of Other Military Compensation
Beyond base pay, service members receive various other forms of compensation, some of which are taxable and others exempt from federal income tax. Allowances for specific expenses are non-taxable. This distinction is outlined in IRS Publication 3, Armed Forces’ Tax Guide.
Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are two common examples of non-taxable allowances. BAH covers housing costs when government quarters are not provided, and BAS offsets food costs. These allowances are not reported as taxable income on Form W-2.
Conversely, certain special pay and bonuses are subject to federal income tax. Examples include hazardous duty pay and re-enlistment bonuses. Flight pay, if not associated with a combat zone, is another example of taxable special pay.
State Income Tax Considerations
State income tax rules for military pay vary significantly across the United States. A service member’s state of legal residence, or domicile, determines their state tax obligations. This remains true even if they are stationed in a different state or overseas.
Many states offer specific exemptions or deductions for military income. Some states do not impose a state income tax at all. Other states fully exempt military pay from taxation, while a third category taxes all military income.
The Servicemembers Civil Relief Act (SCRA) protects military personnel from state taxation. Under the SCRA, a service member’s military income cannot be taxed by a state where they are temporarily stationed if that state is not their legal domicile. This protection also extends to spouses, provided they meet specific criteria related to the service member’s orders and their own domicile.
Combat Zone Tax Exclusions
The combat zone tax exclusion exempts certain military pay from federal income tax. It applies to military pay earned while serving in a designated combat zone or qualified hazardous duty area. These areas are specifically identified by executive order.
For enlisted members and warrant officers, all military pay received for service in a combat zone is excluded from federal income tax. This includes base pay, hostile fire pay, and imminent danger pay. This exclusion reduces their taxable income.
For commissioned officers, the combat zone exclusion is limited to the highest enlisted pay amount plus any hostile fire or imminent danger pay received for that month. A portion of their base pay may still be taxable if it exceeds the exclusion cap. Excluded combat zone pay is reported in Box 12 of Form W-2 with code Q.