Is Military Salary Taxed? What’s Taxable vs. Exempt

Military salary is generally subject to federal income tax, similar to civilian income. However, military members benefit from a unique set of exemptions, exclusions, and special rules that can significantly reduce their taxable income. These specific provisions recognize the distinct nature of military service and its associated challenges.

Taxable and Non-Taxable Components of Military Pay

Understanding which components of military pay are subject to federal income tax is an important first step for service members. Basic pay is fully taxable. This includes active duty pay for regular service, drill pay for reserve and National Guard members, and various types of specialty pay or incentive pay. Most bonuses, such as re-enlistment bonuses, sign-on bonuses, and retention incentives, are also considered taxable income.

Many allowances designed to offset specific costs are non-taxable. The Basic Allowance for Housing (BAH) covers housing costs and is tax-exempt. Similarly, the Basic Allowance for Subsistence (BAS), for food expenses, is also tax-exempt. These allowances are provided to service members who do not live in government-provided housing or eat at government dining facilities.

Other non-taxable allowances include uniform allowances for military uniforms. Cost of Living Allowances (COLA) received for duty in high-cost areas, domestically and overseas, are tax-exempt. Family Separation Allowance (FSA), provided to service members separated from their families due to military orders, is also non-taxable.

Special Tax Exemptions and Exclusions

Beyond inherent non-taxable allowances, specific scenarios can further reduce a service member’s taxable income. The Combat Zone Tax Exclusion (CZTE) renders all pay earned by enlisted members and warrant officers in a designated combat zone tax-exempt. For commissioned officers, the exclusion is capped at the highest enlisted pay amount plus any hostile fire or imminent danger pay received. This exclusion applies automatically to qualifying pay.

Any pay received while hospitalized as a result of injuries sustained in a combat zone also qualifies for this exclusion. This provision ensures that service members recovering from combat-related injuries do not face a tax burden on their earnings during that period. The tax-exempt status continues for up to two years following the end of combat activities.

Pay received for service in a Qualified Hazardous Duty Area (QHDA) is also tax-exempt. These areas provide a similar tax exclusion for service performed there, distinct from combat zones. Certain military-related moving expense reimbursements for a permanent change of station can also be non-taxable.

State Income Tax Considerations

State income tax for military members introduces complexities due to the mobile nature of military service. A service member’s state of domicile, which is their legal residence, determines where they owe state income tax, rather than their temporary duty station. Establishing or changing domicile requires demonstrating intent to reside indefinitely in that state, often through actions like registering to vote or obtaining a driver’s license there.

The Military Spouses Residency Relief Act (MSRRA) allows a military spouse to maintain their original state of domicile for tax purposes, even if they move to a new state to accompany their service member spouse on orders. This means the spouse’s income may not be taxable in the state where the service member is stationed, provided certain conditions are met, such as the spouse also sharing the same domicile as the service member.

Many states offer specific tax benefits for military personnel, such as full or partial exemptions for military pay or retirement income. While these vary by jurisdiction, some states may fully exempt active duty military pay from state income tax, while others might exempt only a portion or offer credits.

Important Tax Forms and Resources

Military members receive a Form W-2, Wage and Tax Statement, which details their taxable wages and federal income tax withholdings for the year. This document is a primary record for preparing federal and state income tax returns.

The Internal Revenue Service (IRS) provides specific guidance for military members in Publication 3, Tax Information for Military Members. This publication offers comprehensive details on various tax rules applicable to service members, covering topics from taxable income to combat zone exclusions. It serves as a reliable and official resource for navigating military tax situations.

Service members can also access free tax preparation assistance through programs like Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE). Many military installations host VITA sites staffed by IRS-certified volunteers who are familiar with military tax issues. Official military pay statements, such as the Leave and Earnings Statement (LES), provide a detailed breakdown of all pay and allowances received throughout the year.