Tax Free Military Income!

One of the financial benefits that many military members and families overlook is the extra money they have in their pockets each month because many of their pay entitlements are not taxed. Unlike most civilian employees, military members are not taxed on all of their income, greatly reducing the tax bite.

While pay items, such as basic pay, flight pay, submarine duty pay, and other special & incentive pays are subject to tax federal and state income withholding, other allowances and benefits are off limits to the tax man. The most common non-taxed benefits are Basic Allowance for Subsistence (BAS) and Basic Allowance for Quarters (BAH) but also include OCONUS COLA, Overseas Housing Allowance, Family Separation, combat zone pay, and travel allowances. There are currently two taxable allowances, CONUS Cost of Living Allowance (COLA) and Basic Needs Allowance. By law, any new allowances that may approved in the future will also be taxable.

Here are some examples to illustrate how much this benefit is worth. We will use two enlisted members and two officers, married and without dependents. We will look at basic pay, BAS, and BAH only for simplicity. Federal tax withholding (FITW) is based on the single members claiming single and the married members claiming married filing jointly with each member subject to the standard Social Security and Medicare (FICA) withholding of 7.65%.

Example 1 – Single Army Private First Class (E3 over 2) stationed at Ft. Bliss, TX

Basic Pay $2,526.90
BAS            $460.25
BAH         $1,176.00

Withholding based on Basic Pay only – FITW $137.89 + FICA $193.91 = Total $331.80
Withholding as if all are taxable – FITW $334.24 + FICA $318.49 = Total $652.73
Savings $320.93/month

Example 2 – Single 1^st Lieutenant (O2 over 3) stationed at Minot AFB, ND

Basic Pay $5,782.80
BAS              $316.98
BAH          $1,386.00

Withholding based on Basic Pay only – FITW $592.30 + FICA $442.38 = Total $1,034.68
Withholding as if all are taxable – FITW $966.95 + FICA $572.66 = Total $1,539.61
Savings $504.93/month

Example 3 – Married Staff Sergeant (E6 over 8) stationed at Twenty-Nine Palms, CA

Basic Pay $4,252.50
BAS              $460.25
BAH         $3,255.00

Withholding based on Basic Pay only – FITW – $181.92 + FICA $325.32 = Total $507.24
Withholding as if all are taxable – FITW $625.46 + FICA $609.53 = Total $1,234.99
Savings $727.75/month

Example 4 – Married Lieutenant Commander (O4 over 12) stationed at Norfolk, VA

Basic Pay $9116.10
BAS          $316.98
BAH        $2781.00

Withholding based on Basic Pay only – FITW $763.27 + FICA $697.38 = Total $1,523.92
Withholding as if all are taxable – FITW $1,327.26 + FICA $934.37 = $2,261.63
Savings $737.71/month

The reality of these tax savings do not usually become apparent until after a military member separates or retires and takes a job in the civilian sector then realizes that ALL of their pay is taxable. It is very important to know the tax bite of a civilian job and the amount of pay it will require to maintain the same level of pay as when in the military. In the case of our married E8 at Twenty-Nine Palms it would take a taxable civilian pay equivalent of $8,874.00 per month to equal the take home pay as when on active duty.

  Active Duty Pay                       Civilian Pay

Basic Pay $4,252.50                          $8,874.00
BAS              $460.25                                           0
BAH          $3,255.00                                          0 
Total           $7,967.75                           $8,874.00
Less FITW       $181.92                              $734.21
Less FICA      $325.32                                $678.86
Net pay    $7,460.51                            $7,460.93

Of course, your tax savings will differ based on your particular entitlements, filing status, and state of residence. If you are subject to a state income tax, your savings will be even higher!

Additional Resources:

Take a look at the IRS Publication 3, Armed Forces Tax Guide, and make sure to check out pages 6 and 7 for a full list of items included and not included in taxable pay. Then, you can compute your withholding using a free paycheck calculator. Also, you can estimate your annual tax liability by using a tax calculator.

Are you looking for more information about any of these Pays and Entitlements? Then, make sure to check out our whole series at My Military Lifestyle!

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