Updated December 26, 2023

Top Military Tax Tips for Filing Your 2023 Taxes

Military members and their families can take advantage of several tax provisions, according to the 2022 version of Publication 3 from the Internal Revenue Service. Here are some top tips […]

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    Military members and their families can take advantage of several tax provisions, according to the 2022 version of Publication 3 from the Internal Revenue Service. Here are some top tips to consider before filing taxes.

    Tax Filing and Deadlines

    The deadline to file 2023 taxes is April 15, 2024. The IRS extends the deadline for filing a return if a military member is in a combat zone or has qualifying service outside of a combat zone. This also applies to service members who are participating in a contingency operation outside the United States away from their permanent duty station.

    Free Tax Filing Services and Consultants

    Military members and their families can get help at many installations through the Military Voluntary Income Tax Assistance program. The legal center on base should be able to confirm if this service is available at the installation.

    Gross Income Exclusion and Deductions

    Service members receive many types of pay and allowances. The IRS includes some of these in the gross-income calculation while excluding others from it.

    Combat Zone Exclusion

    The combat zone tax exclusion allows service members to exclude certain pay from gross income. Typically, the service member must earn the pay in a month that they served in a combat zone.

    According to the IRS website, these types of pay include:

    • Active-duty pay in a combat zone
    • Imminent danger/hostile fire pay
    • Military reenlistment bonus
    • Accrued-leave pay
    • Financial award payments for work suggestions, technical inventions or scientific achievements
    • Student loan repayments

    Miscellaneous Pay Allowances

    According to the 2022 version of Publication 3, the IRS excludes a variety of pay allowances from income, including defense counseling, disability payments, group-term life insurance, professional education, Reserve Officers’ Training Corps education and subsistence, and survivor and retirement protection-plan premiums.

    Living Allowances

    According to IRS Publication 3, the government excludes BAH (basic allowance for housing), BAS (basic allowance for subsistence), international COLA (cost-of-living allowance) and OHA (overseas housing allowance) compensation from gross income.

    Family Allowances

    Military-family dependents receive some exclusions from gross income as well, including certain expenses for education, emergencies, evacuation and separation, according to Publication 3.

    Moving Expenses

    According to Publication 3, service members can exclude benefits received for the realignments and closures of military bases from their taxes. The same consideration covers payments for dislocation. 

    Other types of unreimbursed moving expenses that Publication 3 lists as exclusions include item transportation or storage, trailer relocation and housing costs.

    Death Gratuity

    According to Publication 3, the IRS excludes any death gratuity paid to a survivor from gross income. Survivors can also deduct unreimbursed dependent travel and burial services.

    In-Kind Military Benefits

    The military provides many in-kind benefits, some of which service members do not need to file as gross income. According to Publication 3, these include:

    • Dependent-care assistance program
    • Legal assistance
    • Medical/dental care
    • Commissary/exchange discounts
    • Space-available travel on government aircraft
    • Uniforms furnished to enlisted personnel
    • Jeff Ousley

      Written by Jeff Ousley

      Jeff Ousley is an Air Force veteran and mortgage credit specialist passionate about guiding people toward homeownership.

    Updated May 28, 2021

    How Taxes on Cryptocurrencies Like Bitcoin Work

    Many military investors have jumped into Bitcoin and other cryptocurrencies. As these assets have skyrocketed in value, some people have experienced tremendous gains. But, these gains also come with a […]

    Table of Contents

      Many military investors have jumped into Bitcoin and other cryptocurrencies. As these assets have skyrocketed in value, some people have experienced tremendous gains. But, these gains also come with a cost – taxes. As such, we’ll use this article to explain how taxes on cryptocurrencies like Bitcoin work.

      Specifically, we’ll discuss the following:

      • How the IRS Treats Cryptocurrencies like Bitcoin
      • Determining Cryptocurrency Cost Basis
      • Cryptocurrency Sales: Short- vs. Long-term Capital Gains
      • Ordinary Income Tax Situations with Cryptocurrency
      • Final Thoughts

      How the IRS Treats Cryptocurrencies like Bitcoin 

      When cryptocurrencies like Bitcoin came into existence, the IRS didn’t have a clear policy on taxing these assets. This is no longer the case. Currently, the IRS requires that you report nearly all crypto-related transactions when you file your annual tax return. More precisely, at the top of your IRS Form 1040, taxpayers must now answer the following question: At any time during 20XX, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?

      NOTE: The IRS explicitly states: If your only transactions involving virtual currency during 20XX were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.

      After reporting cryptocurrency transactions, the question becomes, how does the IRS tax them? According to the IRS, cryptocurrency: […] Is a type of virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain. However, the term virtual currency is somewhat misleading, as the IRS doesn’t consider cryptocurrency an actual currency like US dollars. Rather, it: […] Is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency.

      Put simply, the IRS considers cryptocurrency to be property – not currency. Accordingly, to understand how the IRS taxes Bitcoin sales, you need to first understand how the IRS taxes property sales, in general.

      Determining Cryptocurrency Cost Basis

      Taxes related to property sales depend on the tax concept of “cost basis.” In basic terms, cost basis equals a property’s original value. That is, how much did it cost you to purchase an item? For cryptocurrency purchases, that original value equals the amount you paid – in US dollars – for a certain amount of Bitcoin or other coin.

      For example, say that you purchased two Bitcoin at $10,000/coin. Your cost basis for tax purposes would equal $20,000 (two Bitcoin x $10,000/coin). But, say that the exchange where you purchased this Bitcoin also charged a $50 transaction fee. While the IRS doesn’t let you directly deduct that cost, you can add it to your cost basis. This has the effect of eventually reducing your taxable gain at sale. In this example, that would mean that you have a cost basis of $20,050 when you add the transaction fee.

      From this cost basis, the IRS determines your taxable gain when you sell an item. More precisely, when you sell property like cryptocurrency for more than your cost basis, you recognize a capital gain, which we’ll discuss in the next section.

      NOTE: Many cryptocurrency exchanges will calculate your cost basis automatically. Some exchanges will even provide you an IRS Form 1099 on an annual basis (the type of 1099 will depend on the associated activity for the tax year). If not, you or your tax advisor should maintain detailed records of the amounts, dates, and fees for all cryptocurrency purchases and sales.

      Cryptocurrency Sales: Short- vs. Long-term Capital Gains

      While capital gains become more complicated when selling real estate investments, cryptocurrency calculations are fairly straightforward. To calculate capital gains from a cryptocurrency sale, subtract your cost basis and any sale-related transaction fees from the sale price:

      Capital Gain = Sale Price – Transaction Fees at Time of Sale – Cost Basis

      Continuing the above example, assume that you sold those same two coins when Bitcoin prices had increased to $30,000/coin. Your sale price would then equal $60,000 (two Bitcoin x $30,000/coin). And, say that the exchange also charged another $50 transaction fee. In this situation, your capital gains on the cryptocurrency sale would be as follows:

      Capital Gain = $60,000 Sale Price – $50 Transaction Fee at Sale – $20,050 Cost Basis

      Capital Gain = $39,900

      At this point, you know that you have $39,900 in taxable capital gain. Next, you need to figure out the rate at which the IRS will tax that gain. This depends on the length of time that you held the Bitcoin before selling it.

      If you held it for a year or less, the IRS considers your gain a short-term capital gain. And, the IRS taxes these gains at your ordinary income tax rate (i.e. your marginal tax rate). Currently, these rates range from a low of 10% to a high of 37%. If you held these two Bitcoin for six months prior to sale and fall in the 24% income bracket, your capital gain tax would equal:

      Capital Gain Tax = $39,900 Short-term Capital Gain x 24% Tax Bracket

      Capital Gain Tax = $9,576

      On the other hand, if you held the Bitcoin for more than a year before selling it, the IRS considers the gain a long-term capital gain. To incentivize long-term investments, the IRS uses lower, long-term capital gain tax rates of 0%, 15%, or 20%, depending on your income level. Assume you held your Bitcoin for two years and qualify for the 15% long-term capital gain rate. Your capital gain tax would equal:

      Capital Gain Tax = $39,900 Long-term Capital Gain x 15% Tax Bracket

      Capital Gain Tax = $5,985

      As this basic example outlines, you would save $3,591 ($9,576 – $5,985) in taxes by holding your Bitcoin for more than a year. And, while real-world numbers vary, here’s the important takeaway: if you sell cryptocurrency at a gain after holding it for a year or less, you will pay more in taxes.

      NOTE: Some high-income individuals also need to pay a 3.8% net investment income tax on top of the capital gains taxes. This tax is beyond the scope of this article, so consult with a tax professional if you believe you may fall into this category.

      Ordinary Income Tax Situations with Cryptocurrency

      When paying crypto-related taxes, most investors will deal with the above capital gains scenarios. But, in some situations, receipt of cryptocurrencies will qualify as ordinary income. For example, if you are either an A) employee, or B) independent contractor who receives Bitcoin (or any cryptocurrency) as payment for your services, that qualifies as ordinary income. This means that you need to pay A) ordinary income tax rates (10% to 37%), and B) payroll (or self-employment tax) on those earnings. More precisely, according to the IRS:

      For Employees

      […] The fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.

      For Independent Contractors

      […] The fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.

      This reality can pose major challenges to employers, employees, and independent contractors. Administratively, it’s difficult to track the fair market value of a cryptocurrency at the time of every payment. Additionally, the IRS does not accept Bitcoin or other cryptocurrencies to pay tax bills. As a result, when you make your payroll or self-employment tax payment, you still need to use cash, regardless of the fact that the wages were paid in Bitcoin or something similar.

      Final Thoughts 

      While Bitcoin and other cryptocurrencies may seem like attractive investments, the associated taxes can be significant. Before buying crypto or accepting it as payment for services, we highly recommend developing a tax planning strategy. It’s far better to know how taxes on cryptocurrencies work before receiving your first tax bill than getting hit with a nasty surprise!

      Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.

      • Veteran.com Team

        Written by Veteran.com Team

        The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

      Updated December 28, 2023

      Depreciation Recapture Taxes on Investment Properties

      For military members, moving every couple years can be a double-edged sword.  On one hand, it’s tough uprooting your whole family.  On the other, it gives you an opportunity to […]

      Table of Contents

        For military members, moving every couple years can be a double-edged sword.  On one hand, it’s tough uprooting your whole family.  On the other, it gives you an opportunity to build a portfolio of investment properties, especially considering the tremendous benefits of the VA Home Loan program.

        However, as military members transition a property from their primary residence to a rental, it’s critical that they understand the tax implications of such a move.  Specifically, people need to understand how depreciation on rental properties works and, more importantly, how the IRS practice of collecting depreciation recapture taxes affects landlords.

        Understanding – and planning for – depreciation recapture as a landlord will save you a nasty tax surprise when you sell an investment property!

        In the following article, we’ll outline the following to help you understand this important investing topic:

        • IRS residence classifications – primary vs. investment
        • Depreciation – a definition
        • When does depreciation begin?
        • Depreciation recapture taxes on rental properties
        • A comprehensive example for a military family
        • Final thoughts

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        IRS Residence Classifications – Principal vs. Investment

        While the terms primary, principal, rental, and investment all get thrown around among property owners, it’s important to understand that the IRS has specific definitions – and tax treatments – for different residence types.

        • Principal (a.k.a. primary) residence: This is your actual home, that is, the place where you live for the majority of the year. The IRS provides certain tax benefits (capital gains exclusions, mortgage interest deduction, etc) associated with these properties.
        • Investment (a.k.a. rental) property: This is an income-producing property, that is, the homeowner acts as a landlord and rents the property to tenants. Income and expenses related to these properties are treated like business expenses and reportable on a taxpayer’s Schedule E.

        For the purpose of this article, the most important difference between the above two property types is that an investment property is depreciated, whereas a principal residence is not.  This begs the question, what, exactly, is depreciation?

        Depreciation – a Definition

        Prior to discussing depreciation recapture, it’s necessary to first define depreciation, itself.  This is a strange concept for first-time landlords without accounting backgrounds, as taxpayers do not depreciate their principal residences.

        It helps to first think of necessary business expenses.  If you own a business, you likely need to rent office space.  The amount you pay to rent that office is tax deductible as a necessary business expense.

        As a landlord, your property is the largest business expense you’re likely going to make.  But, the IRS wants to get paid, so you’re not allowed to buy a $200,000 rental property and reduce your tax bill by $200,000 in the year of purchase (though that would certainly be nice!).

        Instead, the process of depreciation exists.  According to the IRS, “Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.”

        Basically, the IRS knows that the income provided by a rental property will be spread over multiple years.  As such, the process of depreciation spreads – or “matches” – the associated tax-deductible expense over an extended period during which the property is generating rental income (27.5 years for residential real estate).

        For military landlords, this means that every year, you can reduce your tax bill by deducting the annual depreciation allowed from the rental income received for that property.

        NOTE: Land is not depreciable; only the building on the land is.  So, if you buy a home for $200,000, to figure how much can be depreciated, you need to look at the property tax record.

        If the property is assessed for tax purposes for $150,000 ($100,000 for the house and $50,000 for the land), the landlord’s depreciable base is the purchase value ($200,000) times the ratio of the house value over the total tax assessed value ($100,000/$150,000), for a total of $133,333 (more on this in the below comprehensive example).

        When Does Depreciation Begin?

        Now that we’ve defined depreciation, military landlords need to understand when it begins.  Specifically, if a military family uses the VA Home Loan to buy a principal residence, then moves and rents their home out, when do they start depreciating the property?

        This is a key point for military landlords to understand – depreciation begins when an investment property is placed in service, not purchased. 

        So, for the period when the family from this example is living in their home as a primary residence, they do not depreciate the property.  However, when they move out and place it in service as a rental property (that is, begin marketing it for rent), they begin the depreciation process in the middle of that month.

        For tax purposes, if you began marketing your property for rent in October, you would be able to claim 2 ½ months of depreciation (half of October, all of November, and all of December).

        Depreciation Recapture Taxes on Rental Properties

        Now we can finally tackle the big questions: what is depreciation recapture, and how does it affect taxpayers when they sell an investment property?  

        As the saying goes, the IRS giveth, and the IRS taketh away.  Due to the fact that depreciation reduces a landlord’s taxable income every year, the IRS wants to eventually claw back that money, and it does so through something called depreciation recapture taxes, which are taxes paid in addition to capital gains taxes.

        Here’s a basic example (ignoring transaction costs like realtor commissions):

        • John purchased a home in 2015 for $200,000.
        • From 2015 through 2020, he depreciated $30,000 for a new tax basis of $170,000 (we assume $30,000 was the IRS-allowable amount for the sake of this example)
        • In 2020, John sold the home for $250,000
        • Tax results:
          • $50,000 ($250,000 sales price minus $200,000 purchase price) in capital gains taxed at either 0%, 15%, or 20% tax rates
          • $30,000 ($200,000 purchase price minus $170,000 post-depreciation tax basis) in depreciation recapture taxed at a flat rate of 25%

        What this means is that, if Bob didn’t understand depreciation recapture, he would think that he was only going to receive a tax bill for the property sale of $7,500 ($50,000 gain times 15% capital gains rate). But, he’s also on the hook for a depreciation recapture bill of another $7,500 ($30,000 in allowed depreciation times 25%)!

        So, by not understanding depreciation recapture, Bob would have underestimated his tax liability by half, thinking he owed $7,500 instead of $15,000.

        And, if that’s not bad enough, the IRS is going to charge Bob that depreciation recapture tax regardless of whether he actually recorded depreciation on his tax returns for the time he rented his property, so make sure you depreciate every year!

        A Comprehensive Example for a Military Family

        Depreciation and depreciation recapture can be pretty daunting topics for new landlords, but they don’t need to be. The following is a comprehensive example that ties all of the above together for a military family. 

        • In 2010, Captain Smith and his wife used the VA Home Loan to purchase their home in San Antonio. The couple lived in this home through the end of 2013, and then they were transferred to California. Instead of selling the house, they decided to turn it into an investment property and rent it out.
        • They purchased the home in 2010 for $300,000, and the tax assessment valued it at $250,000 ($200,000 for the house and $50,000 for the land).
          • Depreciable base: $300,000 x ($200,000 / $250,000) = $240,000
          • Annual IRS-allowed depreciation: $240,000 / 27.5 years = $8,727/year
        • From January 2014 through December 2019, Captain Smith and his wife rented their property, depreciating the allowable amount of $8,727 each year (this means that if they received $20,000 in rental income each year, they’d be able to reduce the taxable amount with depreciation by $8,727 each year).
        • At the end of 2019, their taxable basis in their rental property now was $247,638 ($300,000 purchase price – $8,727/year x 6 years).
        • In January 2020, they sold their rental property for $350,000, and here are the taxes they needed to pay:
          • Capital gains: $50,000* x 15% = $7,500
            • (*$350,000 sale price minus $300,000 purchase price)
          • Depreciation recapture: $52,362* x 25% = $13,091
            • (*$300,000 purchase price minus $247,638 taxable basis at sale)

        So, without considering depreciation recapture, Captain Smith and his wife would’ve only planned on $7,500 in taxes related to their investment property sale.  But, with depreciation recapture, their total tax bill was $20,591!

        Final Thoughts

        While you can’t avoid depreciation capture when you sell a property, planning for it will save you from a nasty tax surprise when you sell your investment property.

        And, for military investors looking to continue building their rental real estate portfolios after the sale of one property, using a 1031 exchange is a technique to defer paying the depreciation recapture tax.

        Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.

        • Veteran.com Team

          Written by Veteran.com Team

          The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

        Updated January 30, 2025

        Taxes on Military Bonuses

        Military bonuses are paid to troops for a variety of reasons: enlisting or reenlisting into a short-staffed career field, “quick ship” military enlistment bonuses, etc. There are even military bonus […]

        Table of Contents

          Military bonuses are paid to troops for a variety of reasons: enlisting or reenlisting into a short-staffed career field, “quick ship” military enlistment bonuses, etc. There are even military bonus options for those returning to duty in the Guard or Reserve after prior military service.

          Are you an Airman, Coast Guard member, Soldier, Sailor, or Marine expecting a military bonus in the current or forthcoming tax year? Bonuses are paid in a variety of ways, but they are typically subject to taxation unless special circumstances apply.

          Depending on current law, your branch of service, the nature of your bonus, and when/where it is paid can all affect the amount of tax you are required to pay.

          Types Of Military Bonuses

          The U.S. military may fall under a single organization, the Department of Defense, but its various branches all have their own unique and individual recruiting programs. The Army knows how to recruit new soldiers and the Air Force has its own processes for finding new Airmen.

          It stands to follow that military bonuses would also be service-unique in some ways. Not all branches of service offer the same number of bonuses, the same amounts, or the same terms and conditions. What works in the Marines doesn’t always work for the Coast Guard, and the same applies to other branches.

          What follows below are some examples of bonuses you may or may not be offered or have access to in your time serving; these should be viewed as examples of things you should be asking about in the recruiter’s office rather than a comprehensive list of available bonuses.

          What Bonuses Are Not

          Remember that there are different types of military pay: basic pay, allowances, special pay, and bonuses. The military bonus is usually offered conditionally for enlisting or re-enlisting into certain career fields. Military bonuses may be paid to enlist, re-enlist, or for possessing specialty skills.

          What follows is not a complete list. The items seen here are subject to change, enhancement, cancellation, or modification at any time by the federal government.

          Examples Of U.S. Army Enlistment Bonuses

          • Two-Year Option 26 Bonus
          • Army Reserve Officer Candidate School Bonus
          • Ranger Bonus
          • 35m Human Intelligence Collector Bonus
          • Non-prior-service Enlistments Bonus
          • 35p Cryptologic Linguist Bonus
          • Health Care Professionals
          • Loan Repayment Program

          Examples Of Air Force Retention/Reenlistment Bonuses (Based On Career Field)

          • In-Flight Refueling
          • Flight Engineer
          • Aircraft Loadmaster
          • Airborne ISR Superintendent
          • Airborne Crypto Language Analyst–Arabic
          • Airborne Crypto Language Analyst–Chinese
          • Airborne Crypto Language Analyst–Korean
          • Airborne Crypto Language Analyst–Russian
          • Airborne Crypto Language Analyst–Spanish
          • Airborne Crypto Language Analyst–Hebrew
          • Airborne ISR Operator
          • Special Missions Aviation
          • Cyber Warfare Operations
          • Air Traffic Control
          • Combat Control

          Examples Of DoD Bonuses for Skills or Proficiency

          Some bonuses may be paid to service members for certain skill sets that are hard to come by or require much training. An excellent example of this can be found in the DoD Health Profession Officers bonus list, which includes the following:

          • Health Professions Accession Bonus
          • Critically Short Wartime Accession Bonus
          • Dental Corps Incentive Pay/Retention Bonus
          • Medical Corps Incentive Pay/Retention Bonus
          • Nurse Corps Incentive Pay/Retention Bonus
          • Specialty Incentive Pay/Retention Bonus
          • Dental Corps RC Accession Bonus/ Retention Bonus
          • Medical Corps RC Accession Bonus/Retention Bonus
          • Nurse Corps Reserve Component Accession Bonus & Retention Bonus
          • Specialty Reserve Component Accession Bonus & Retention Bonus

          Taxes On Your Military Bonus

          Military pay is subject to federal tax in ways that are defined by federal law. Your regular pay is taxable in the same way that other income is taxed. Keep in mind, you won’t be charged federal tax on your earnings if you earn that income in a combat zone or under other circumstances that make the income tax-exempt.

          You will need to indicate on your tax forms that you were indeed earning money under conditions deemed exempt from federal taxation, and you will also need to provide supporting documentation such as orders or other proof of your deployment.

          Military bonuses are subject to taxation at the time of payment. Past rules (mentioned earlier in this article) issued by the Internal Revenue Service required the Defense Accounting And Finance Service (DFAS) to withhold 25% of that bonus (later reduced to 22%) on payment.

          In the case of a non-combat zone military bonus pay or others subject to a “no tax” clause, you are taxed upfront when the bonus is paid.

          Taxes Do Not Always Apply

          As mentioned previously, you won’t be taxed for a bonus paid while you are serving in a combat zone. However, if you are getting partial bonus payments or any kind, or if you are paid a bonus at a time when you are NOT in a combat zone, it is entirely possible that your tax burden will not include any payments made while you were assigned there.

          Any payments you take before or after that duty may be subject to taxation because you weren’t in the combat zone officially.

          This is a nuanced issue. Don’t assume that your tax outcome from previous years will remain the same since laws change frequently.

          Other Tax Issues You Should Know About

          Service in a combat zone may exempt you from certain taxation. So does putting your money into a retirement account such as the Thrift Savings Plan, a Roth account, etc. In some cases, you may still owe taxes but they can be delayed until you withdraw money later.

          The rules for retirement accounts are just as complex as tax laws, and what applies one year may not apply next year.

          Talk to a financial advisor about the smartest way to invest a bonus if you want the maximum tax benefit. Retirement plans have unique requirements and you may find that some plans aren’t exactly right for your needs compared to others.

          Which do you choose? It depends greatly on your financial goals and needs.

          Contributing To A Retirement Plan In A Combat Zone

          Military bonus or not, those serving in combat zones are eligible to contribute more than the yearly retirement plan limit. However, there may be specific rules that apply to such contributions.

          If you plan to exceed the limit, it’s best to turn to a financial advisor for help since you may be required to set up a traditional account for excess contributions.

          Paying Back Military Bonuses

          Some people get a bonus but wind up being required to pay it back because of disciplinary problems, a failure to complete the entire enlistment for which the bonus was paid, etc. You may or may not be entitled to revise a previous tax filing in such cases to reflect that the money was paid back.

          You will need to consult the current tax season’s rules in this area to learn what is permitted this year and how much. Since tax laws change frequently there is no way to guarantee you will be eligible for any refund of taxes until you’ve had your forms reviewed by a tax professional or IRS rep.

          Things To Remember About Taxes and Military Pay

          Tax laws change every year. What you read about today may be modified, eliminated, or replaced by other rules. Once upon a time, military bonuses that were not tax-exempt were subject to a 25% tax but later reduced to 22%.

          Is the tax rate 22% today? What is the most accurate rate today?

          A tax professional or a look at the current rules will be the most reliable source of current tax requirements. It is never safe to assume last year’s tax laws apply in the current year. On-base and online tax help for service members is available. Don’t pass up the chance to use it.

          • Veteran.com Team

            Written by Veteran.com Team

            The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

          • Andrew Stamp

            Reviewed by Andrew Stamp

            Andrew Stamp served in U.S. Army special forces for more than 10 years and is currently pursuing his Chartered Financial Consultant (ChFC).

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          Updated December 26, 2023

          Taxes on Military Pay & Allowances

          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 […]

          Table of Contents

            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.

            • Veteran.com Team

              Written by Veteran.com Team

              The editorial team here at Veteran.com works to help the U.S. military community discover the many military benefits available to them. Our team is supported by our Veteran Review Board and its Standard of Care, which all content on Veteran.com is reviewed to meet.

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