Tax Rules Affecting the Military, Part 2 Taxable Income

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Tax season is drawing to an end, and you’ve only got about 2 weeks to complete your taxes before the end of the year. Fortunately, there are several places that provide free tax preparation for military members. If you are looking to do your own taxes, it helps to know which pay and benefits are…

Tax season is drawing to an end, and you’ve only got about 2 weeks to complete your taxes before the end of the year. Fortunately, there are several places that provide free tax preparation for military members. If you are looking to do your own taxes, it helps to know which pay and benefits are taxable, and which are not.

Military pay is confusing. There are a lot of different rules regarding military pay and which benefits, bonuses, and special pays are taxable and which are not. This series of articles will focus on clearing up some of the confusion.

Taxable military benefits

As a military service member, you earn money from several different allowances and benefits, and there rules regarding which of these must be reported to the IRS as income and those you can exclude.

The following items must be included in your reported gross income unless they were earned while you were serving in a combat zone. The good news, is that military taxpayers who receive tax-free combat pay can continue to include it as earned income when determining the Earned Income Credit and Additional Child Tax Credit, and for purposes of making an IRA contribution.

Basic pay

  • Active Duty Pay, Reserve Training, and Guard Drill Pay
  • Attendance at a designated service school
  • Back wages

Special pay

  • Aviation Career Incentive
  • Diving Duty
  • Foreign Duty
  • Medical, Dental, Pharmacy, Optometry, and Veterinarian pay
  • Nuclear-Qualified Officers
  • Special-Duty Assignment pay

Bonuses

  • Enlistment / Reenlistment
  • Officer
  • Career Status
  • Overseas Extension

Other payments

  • High Deployment Per Diem
  • Accrued leave
  • Personal money allowances paid to high-ranking officers
  • 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).

Please keep in mind this list is not an all-inclusive list and it is subject to change. Always check with an accountant or your base finance office for further details.

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About Ryan Guina

Ryan Guina is the founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Mina says

    I didn’t get the info…you say allowances are military taxable income,..what about Veterans benefits, retirement pay..not clear

    • Ryan Guina says

      Mina, Military pay and benefits are different than veteran pay and benefits. Typically, military retirement pay is taxable income at the federal level, and at the state level for some states (some states either don’t have income tax, or they exempt retirement pay or pensions from state income taxes). VA service-related disability compensation is a non-taxable income.

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