Members of the U.S. Armed Forces receive income and benefits to support themselves and their families. One frequently asked question about military income, compensation packages and benefits is whether they are all taxable. The answer is not always clear-cut since federal taxes depend on a specific military benefit as well as a range of other considerations.
This post sheds light on taxes for military pay and benefits, including the income the IRS does and does not tax.
What Military Pay Does the IRS Tax?
The IRS considers some specific benefits and allowances provided to military service members as taxable income. These include:
- Basic Income: Standard salary paid to service members is taxed by the IRS.
- Bonus Income: Enlistment bonuses, accrued paid leave, and other extra military benefits are generally taxable income.
- Separation Income: In cases where service members separate from the military, and not by choice, some “separation” pay may be taxed by the IRS.
- Special Income: Certain special military payments, such as pay when serving overseas, are also considered taxable.
What Military Benefits Are Exempt from Federal Taxes?
Several military benefits are exempt from federal income tax. The tax-exempt benefits intended to aid military personnel and their families include:
- Basic Allowance for Housing: BAH is designed to help service members finance housing. This allowance is generally not taxed by the IRS.
- Basic Allowance for Subsistence: BAS covers food expenses and is not subject to IRS taxes.
- Combat Pay: Combat pay is paid to U.S. military personnel deployed to designated combat zones or those facing immediate danger while serving. This compensation is entirely exempt from federal income taxes.
- Military Disability Benefits: Disability benefits for military service are typically exempt from IRS taxes.
- Overseas Housing Allowance: OHA provides financial support to military personnel for international housing expenses. This allowance is not taxed by the IRS.
- Survivor Benefits: Survivor benefits, such as Dependency and Indemnity Compensation, are generally exempt from IRS taxes.
- Veterans (VA) Benefits: Benefits offered by the Department of Veterans Affairs, including disability compensation, pension, and education assistance, are typically not subject to federal income taxes.
What Tax Breaks Does the IRS Give to Military Families?
U.S. military members may qualify for various IRS tax breaks that recognize unique financial challenges they face while serving. Here are some of the key federal tax breaks given to military families:
Death Benefits
Death gratuity awarded to surviving family members of deceased Armed Forces personnel is $100,000. Benefits for deaths that occurred after September 10, 2001 are not taxed by the IRS.
Sale of Principal Residence
Can temporarily pause the standard 5-year ownership and use requirement for up to a decade when the service member or spouse is serving extended military duty. This means service members are stationed more than 50 miles away from a primary residence or reside in government quarters, either for a period exceeding 90 days or indefinitely.
It is important to note that this option only applies to a single property at any given time.
Deduction for Overnight Travel Expenses
Reservists and National Guard members who spend a night more than 100 miles away from their residence during their military service, such as attending a drill or meeting, are eligible to claim unreimbursed travel expenses such as cost of transportation, meals, and accommodation as an above-the-line deduction. This deduction is subject to the same expense rates approved for federal employees.
DoD Homeowners Assistance Program (HAP)
Payments offered under this program to mitigate the negative impact on housing values resulting from military base realignment and closures will be exempt from IRS taxes as a fringe benefit. Furthermore, payments to military personnel are also exempt from Social Security and Medicare taxes.
Are Military Members Eligible for EITC and Other Tax Credits?
The Earned Income Tax Credit (EITC) is a federal tax credit designed to provide financial assistance to lower income individuals and families. Special rules apply when calculating the EITC if a taxpayer is a military member. The EITC military rules apply if you:
Get Non-Taxable Military Pay
If you or your spouse receive non-taxable military pay like combat pay, housing allowance, or subsistence allowance, as a member of the military, you do not have to report it as earned income on your federal taxes.
However, if you and your spouse decide to include your non-taxable earnings as part of your earned income when applying for the Earned Income Tax Credit (EITC), you could potentially reduce your tax liability and receive a larger tax refund. In such cases, the individual who chooses to include the non-taxable pay as earned income must report the entire amount.
Are Stationed outside the U.S.
Military members stationed outside the United States may still be eligible to claim the Earned Income Tax Credit (EITC) under certain conditions.
According to the IRS, individuals serving in the U.S. military stationed abroad for an extended period of active duty are regarded as residing in the United States for Earned Income Credit (EIC) purposes during that duty period.
Does the IRS Have Special Tax Rules for Active-Duty Military Pay?
The IRS has special tax rules and considerations for active-duty military pay. These rules are designed to provide certain tax benefits and accommodations to members of the U.S. Armed Forces. One such rule regards the earned income tax credit. In this regard, special rules provide military personnel receiving non-taxable combat pay with the option to include it in their taxable income.
This choice can be advantageous, particularly for those seeking to boost their EITC amount. Individuals eligible for this credit may reduce their tax liability or even receive a higher tax refund.
Will the IRS Extend Tax Return and Payment Deadlines for Military in Combat Zones?
Certain military personnel, particularly those deployed in combat zones, have the option to defer specific tax deadlines. If you fall into this category, you are eligible for automatic extensions for both filing your tax return and paying your taxes.
Is the Military Tax Return the Standard 1040 Form?
When military personnel file their taxes, they generally use the same tax forms as civilians, including the standard IRS Form 1040. If you are stationed in the U.S. and need to request a six-month extension, you can do so by submitting IRS Form 4868 before the deadline.
However, active-duty military members stationed outside of the U.S. are eligible for an automatic two-month extension and do not need to complete Form 4868.
Do Military Members Qualify for IRS Tax Relief When They Can’t Pay Taxes?
Like any other taxpayer, members of the military qualify for IRS tax relief if they are unable to pay their taxes. These include:
- Installment Agreements
- Offer in Compromise (OIC)
- Temporary Collection Delay
- Military Combat Zone Relief
Military taxes for income and benefits are a complex matter. If you are a member of the U.S. Armed Forces and need help to understand your IRS taxes and exemptions, call us at 866-568-4593.
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