Taxes can be confusing in the best of times, but where military pay, allowances, and bonuses are concerned, half the battle is determining what is considered tax-exempt, what is subject to taxes and withholding, and when other tax rules such as the Capital Gains Tax may come into play.
It is always best to consult the services of a trained tax professional when in doubt about whether combat pay, re-enlistment bonuses, incentive pay, or pay raises are taxed and by how much. Tax laws change frequently, sometimes yearly depending on the law, and your deductions and liabilities may not be the same from last year to this year.
What follows is not tax advice. Always consult a trained professional for advice and information on tax law. What follows can be considered as a head start on your own homework in this area; don’t go into your next tax season uninformed. What follows does NOT address state tax issues-this article is limited to federal taxes.
Military Pay And Allowances: What Is Considered Not Taxable By The IRS
One of the first hurdles you will need to overcome when trying to understand how military pay and allowances are taxed by the federal government is how military pay differs from military allowances, and how these things differ from things like hazardous duty pay, reenlistment bonuses, or tuition benefits.
A good general rule of thumb to start off with is that all military pay is subject to federal income tax. Most military allowances are not subject to federal taxation, but there are exceptions (see below). So a service member’s basic pay will be taxed, but not the housing allowance, separate rations allowance or BAS (basic allowance for subsistence), clothing allowance, etc.
A Military Allowance That Is Subject To Federal Income Tax
The military allowance known as COLA, the Cost Of Living Allowance, is an example of a military allowance that is subject to tax under specific circumstances. Stateside COLA is taxable, but the overseas version is NOT TAXABLE at the time of this writing. Overseas COLA is known by several names including OCONUS COLA and receiving this overseas version of the Cost of Living Allowance will not affect your tax position.
Some Tax Breaks Are Affected By Non-Taxable Military Allowances
The IRS allows veterans to claim a tax deduction for military uniforms you cannot wear when not serving or off duty. You are permitted to deduct both the cost of the purchase of these uniforms and any maintenance or upkeep, which is handy for sewing on new stripes after getting promoted and other modifications which may be required. But this tax deduction must be adjusted by the amount of your annual military clothing allowance, where applicable.
Military Retirement Income: Confusion At Tax Time
Military retirement pay is not a “bonus” but since we are discussing tax regulations and attempting to end confusion about what is taxable and what is not, it is important to address one of the most confusing areas at tax time-when your military retirement pay is taxable, and when it isn’t.
Retirement pay is taxable at both the state and the federal level. Most states in the 21st century have offered either a total tax break for qualifying veterans, or some form of a tax exemption for retirement pay. Federal income tax rules require retirement pay including military retirement pay to be considered for taxation. However, if you are drawing disability pay instead of standard military retirement pay, you’ll find that disability pay is commonly given a tax exempt status. Since tax law changes every year, it’s best to consult with a tax professional.
That said, the VA official site reminds, “Disability benefits received from the VA should not be included in your gross income.” What does the IRS consider to be a disability benefit?
- Disability compensation and pension payments
- Grants for homes designed for wheelchair living
- Grants for motor vehicles for Veterans who lost their sight or the use of their limbs
- Benefits under a dependent-care assistance program
The Combat-Injured Veterans Tax Fairness Act of 2016
The Combat-Injured Veterans Tax Fairness Act of 2016 provides tax relief to veterans who have separated from the military and suffer from combat-related injuries. These vets will not be federally taxed on the Department Of Defense one-time lump sum disability severance payment they receive when separating from service.
Any service member who was taxed on this payment are instructed to file an amended return with the IRS to apply for a refund.
Military Money That Is Not Added To Your Gross Income At Federal Tax Time
The following military pay, benefits, etc. are in general not supposed to be counted in your gross income for federal tax purposes:
- Basic Allowance for Housing, also known as BAH
- Basic Allowance for Subsistence or BAS
- Cost of Living Allowance (COLA) while living overseas
- Overseas Housing Allowance
- Dependent care assistance
- Family Separation Pay
- Dislocation Allowance
- Relocation or storage of household goods
- Mobile home, trailer, or automobile shipment during PCS moves
- Temporary Lodging Allowance or TLA
- Burial services
- Travel of dependents to burial site
- Death gratuity payments to eligible survivors
- Medical / Dental care
Taxable Military Pay/Benefits
We use the term “pay” here in a broad sense-the following types of income may be included in your gross income at federal tax time unless these were earned in a combat zone. You will need to consult a tax professional to discuss the tax implication of the following in or outside of a combat zone:
- Active Duty Pay
- Reserve Training Pay
- Guard Drill Pay
- Special-Duty Assignment pay
- Aviation Career Incentive Pay
- Diving Duty Pay
- Foreign Duty Pay
- Medical, Dental, Pharmacy, Optometry, and Veterinarian pay
- Nuclear-Qualified Officers Pay
- Enlistment / Reenlistment Bonuses
- Officer Pay
- Career Status Pay
- High Deployment Per Diem
- Cashed-ln accrued leave
- Student loan repayment from programs such as the Department of Defense Educational Loan Repayment Program (certain exemptions may occur if you serve in a combat zone during the repayment period).
Tax laws are subject to change on a frequent basis. It’s bad to assume you must or may not have to claim or declare certain kinds of income related to military service. Always discuss your needs with a tax professional for the most up-to-date rules and regulations affecting your income.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News
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