Do you know that there are certain built-in tax advantages for military pay? As a member of the Armed Forces, you receive many different types of pay and allowances. Some of your pay and most of your allowances are excluded from your gross income. This means they aren't taxed.
Taxable Gross Income
In general, if you are a member of the Armed Forces, most of your pay is included in gross income for federal income tax purposes. All gross income is taxable. You probably receive basic pay, special pay, bonuses and other payments. All of this counts as gross income, unless the pay or bonus is for service or re-enlistment while in a combat zone.
Basic pay is the main component of military salary. It includes amounts paid as back wages and amounts paid for services performed during active duty, attendance at designated service schools, drills, reserve training and training duty.
Special pay is for specific qualifications or events. It includes amounts paid for aviation career incentives, diving duty, foreign duty, hostile fire or imminent danger, medical and dental officers, nuclear-qualified officers and special duty assignment pay.
Bonuses may be paid for enlistment or reenlistment. Other payments include accrued leave, personal money allowances paid to high-ranking officers and student loan repayment programs.
Combat Pay Excluded from Taxable Income
Earnings received while you're in a qualified hazardous duty area or a designated combat zone are excluded from taxable income. This exclusion is unlimited for enlisted members and warrant officers but is limited for other officers. If you spend a single qualifying day in a combat zone, that month's pay isn't taxable.
If you're injured in a combat zone and hospitalized, any pay received while in the hospital isn't taxed. If you accrue any annual leave for time spent in a combat zone and you're paid for that leave when you're discharged, that pay isn't taxed. Finally, any re-enlistment bonus is excluded from taxable income if you re-enlist while in a combat zone.
Nontaxable Allowances and Benefits
Most allowances aren't taxed. Allowances are the nontaxable monies authorized for food, housing, clothing, travel and transportation. The most common allowances are Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAH). There are many other types of allowances, such as Overseas Housing Allowance (OHA), Family Separation Allowance (FSA), uniform allowances and meal allowances, that aren't taxable.
Other nontaxable benefits include:
- Benefits received under a dependent-care assistance program
- The death gratuity paid to a survivor of a member of the Armed Forces
- Disability retirement pay to the extent of disability (for example, if your disability rating is 40%, then 40% of your disability retirement pay is tax-free)
- Qualified military benefits, including veteran's benefits, medical benefits, professional education, moving and storage expenses, and group term life insurance and survivor and retirement plan premiums
The favorable tax treatment of your military compensation package can make a substantial difference in your finances, and a tax law attorney can help answer your tax questions and make smart tax planning decisions.
Questions for Your Attorney
- How is compensation for reserve duty taxed? Is it the same as for military members who are on active duty?
- What other tax laws should I be familiar with if I'm in the military?
- Are there any special issues to know about when a married couple has one spouse in the military and the other has a civilian job? Does it depend on what type return is filed?