Tax Advantages for the Military

As tax regulations change, there will also be changes to your base pay, bonuses, and allowances as a servicemember. The key is understanding what part of your income is taxed and what is not.

How to Prepare for Tax Season

Before you start preparing your tax return, gather the information and documents you’ll likely need:

• Military ID

• Social Security Numbers (for each family member claimed)

• Wage and earning statements such as a W-2, W-2G or 1099-R

• Childcare cost information

• Investment income documentation

• Receipts for charitable donations

• Receipts for deductible expenses like reasonable previously un-reimbursed moving expenses

• Bank routing and account numbers for direct deposit

• Last year’s tax returns

You should also take a look at the following military tax benefits and make sure you have all the documents you need to qualify.

Active Duty Military Tax Benefits

You provide a valuable service to your country. See which military tax advantages, including deductions and exemptions, you should be aware of when filing this season.

Household Goods Shipments (HHG)

Payments, allowances, or reimbursements for shipping your household goods and personal belongings during an official military relocation (Permanent Change of Station or PCS) are not included in taxable income when they meet IRS requirements. Active-duty members moving due to military orders may also be eligible to claim unreimbursed moving expenses on IRS Form 3903. 

Combat Zone Pay

If you serve in an IRS-designated combat zone, your military pay for that period is excluded from federal taxable income under the Combat Zone Tax Exclusion (CZTE). This includes base pay, reenlistment or continuation bonuses earned while in the zone, imminent danger pay, hostile fire pay, and related incentives. For enlisted members and warrant officers, the exclusion is generally unlimited; for commissioned officers, it is limited to the highest enlisted basic pay plus eligible danger/pay allowances. 

Thrift Savings Plans (TSP) Tax Implications

Your TSP contributions follow standard tax rules no matter where you serve. Traditional TSP contributions lower taxable income now and are taxed on withdrawal in retirement, while Roth TSP contributions are made with after-tax dollars and generally grow tax-free if withdrawal rules are met. Combat zone pay exclusion reduces taxable income, but it does not change how Traditional or Roth TSP contributions are fundamentally taxed.

Basic Allowance for Housing & Subsistence

Both Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are non-taxable components of military compensation. BAH is designed to cover housing costs and varies based on factors such as location, rank, and dependency status. Since BAH provides support for housing needs, it’s not considered taxable income, offering servicemembers financial relief in meeting their housing expenses.

Similarly, BAS, which helps offset the cost of meals, is also non-taxable. BAS rates are standardized and not influenced by individual circumstances. This allowance ensures servicemembers have the means to afford meals without incurring additional tax liabilities.

Family Separation Allowance

Family Separation Allowance (FSA) is a financial benefit provided to military servicemembers who endure prolonged separations from their dependents when fulfilling their duty requirements. The FSA is not taxable income. If you receive FSA during challenging periods of family separation, you won’t have to worry about it being taxed alongside other income.

Uniforms

Under current federal tax law, unreimbursed expenses for acquiring and maintaining uniforms are not deductible on your federal income tax return. Some states may still allow a deduction on state returns, but for federal purposes you cannot claim these costs as a deduction unless they qualify under military-specific moving expense rules. 

Dislocation

Dislocation Allowance (DLA) is a tax-free cash allowance that reimburses servicemembers for certain expenses associated with authorized relocations such as PCS, evacuations, or government-ordered moves. The amount is based on rank and dependency status and helps offset the costs of relocating your household.

Family Subsistence Supplemental Allowance

Another non-taxable allowance is any Family Subsistence Supplemental Allowance (FSSA) you might receive. The FSSA is a financial support program for military families facing difficulty meeting their basic food needs. 

Interest on Life Insurance

Interest accrued on life insurance, as detailed in policies such as AAFMAA’s Value-Added Whole Life and Wealth Builder Life Insurance, is not taxable. The interest earned on the cash value of these policies, dictated by the crediting rate, is directed toward covering policy expenses and remains non-taxable. When the policyholder passes away, beneficiaries typically do not incur taxes on the death benefit, as the IRS generally does not tax these proceeds in most cases.

However, if beneficiaries opt to leave the death benefit with the insurance provider and earn interest, the interest may be taxable income, reported on Form 1099, if it exceeds $600. Cashing a whole-life policy may result in taxable income, with the government taxing the amount greater than the premiums paid. Policy loans, exchanges, and life insurance proceeds used for Long-Term Care Settlements generally do not incur taxes, providing tax advantages in specific circumstances.

Tax-Exempt Active Duty Income

Many types of Active Duty income is tax exempt, including:

• Combat pay (when eligible under Combat Zone Tax Exclusion rules)

• Certain disability pay

• Death allowances

• Certain educational expenses for dependents

• Basic Allowance for Housing (BAH)

• Basic Allowance for Subsistence (BAS)

• Overseas Housing Allowance (OHA)

• Travel allowances (for qualifying travel and relocation expenses)

• In-kind military benefits

• Group-term life insurance

• Professional education

• Survivor and retirement protection plan premiums

• Uniform allowances

Taxable Active Duty Income

Not all active-duty income is tax-exempt. You’ll still have to pay taxes on the following types of pay:

• Base pay

• Hazardous duty pay (unless excluded under combat zone rules)

• Combat Zone Tax Exclusion (CZTE)

• Special duty assignment pay (unless excluded under combat zone rules)

• Hardship duty pay (unless excluded under combat zone rules)

• Flight pay (unless excluded under combat zone rules)

• Sea duty pay (unless excluded under combat zone rules)

• Submarine duty pay (unless excluded under combat zone rules)

• Dive duty pay (unless excluded under combat zone rules)

• Imminent danger pay (tax-exempt if eligible under combat zone rules)

• Hostile fire pay (tax-exempt if eligible under combat zone rules)

• Bonuses (unless excluded under combat zone rules)

• Pay for accrued leave (unless excluded under combat zone rules)

• Student loan repayments (may be partially excluded under combat zone rules, depending on the service period required)

Refer to your W-2 for more information on taxable vs. tax-exempt pay.

Non-Active Duty & Veteran Military Tax Benefits

These Veteran benefits are also tax-free:

• VA Survivor Benefits for Spouses

• VA Survivor Benefits for Children

• VA Disability Benefits

• Post-9/11 GI Bill

We Help Servicemembers Like You

Armed Forces Mutual is here to help you understand and capitalize on all the tax benefits available to you. Contact us today to learn more about the benefits of Membership. 

Tax laws and eligibility rules can change, so always review current IRS guidance or consult a qualified tax professional.