Taxes on Military BonusesUpdated: March 31, 2020
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.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.