Taxable and Non-Taxable Military Benefits
Military pay is taxable, but not all military benefits are. Some are excluded by law, including hostile fire pay, housing allowances, and uniform allowances. But other military pay and benefits are not excluded from taxation.
Your reenlistment bonus, sea pay, and separation pay may be subject to taxes. We’ve compiled a list of taxable and non-taxable military benefits below, but remember that tax laws change frequently and the rules applicable in last year’s tax season may be different from those in later years.
Non-Taxable Military Benefits
The Basic Allowance for Housing provides monthly tax-free funds to active duty members residing in civilian housing. Payment rates depend on location, rank, and dependency status. Title 26 section 134 of the United States Code excludes housing allowances from federal gross income.
The Overseas Housing Allowance assists troops stationed outside the United States with private housing expenses. Rates adjust for local currency exchange rates and actual rental costs. These payments remain exempt from federal income tax.
Basic Allowance for Subsistence
The Basic Allowance for Subsistence is for active duty members. Rates adjust annually based on the Department of Agriculture food cost index. The IRS excludes subsistence allowances from gross income.
Outside Continental United States Cost of Living Allowance
Troops assigned to non-foreign regions outside the contiguous United States, including Hawaii, Alaska, Puerto Rico, and Guam. Troops receive a cost-of-living allowance to offset higher local prices.
The Family Separation Allowance provides monthly payments to service members during deployments or remote tours where dependents cannot accompany them. Federal law excludes this allowance from gross income calculations.
Dislocation Allowance and Relocation Travel Reimbursements
The Dislocation Allowance helps service members cover miscellaneous moving expenses during a permanent change of station. Travel reimbursements cover mileage, per diem meals, and lodging during relocation. The IRS treats qualified moving allowances and travel payments as non-taxable reimbursements.
Clothing and Uniform Allowances
Enlisted troops receive annual clothing allowances to replace worn uniform items, while commissioned officers receive an initial uniform stipend upon entering active duty. Internal Revenue Code section 134 classifies official military clothing allowances as qualified non-taxable fringe benefits.
Combat Zone Tax Exclusion Pay
Military pay earned by troops and warrant officers serving in designated combat zones is tax-free. Commissioned officers exclude combat earnings up to the maximum enlisted basic pay rate plus hostile fire pay. DFAS excludes exempt amounts from Box 1 on Form W-2.
Hostile Fire and Imminent Danger Pay Inside Combat Zones
Hostile Fire Pay and Imminent Danger Pay earned within combat tax exclusion areas fall under Section 112 combat tax exclusions. When earned inside these designated zones, danger payments are free from federal income tax.
Department of Veterans Affairs Disability Compensation
Department of Veterans Affairs disability compensation provides monthly tax-exempt payments to veterans with medical conditions resulting from military service. The VA issues no Form W-2 or Form 1099 for disability compensation. Title 38 section 5301 of the United States Code prohibits federal taxation of veteran disability benefits.
Combat-Related Special Compensation
Combat-Related Special Compensation provides tax-free monthly payments to eligible military retirees with service-connected disabilities linked to combat operations or hazardous training. These payments restore military retirement pay waived to receive VA disability compensation.
Dependency and Indemnity Compensation
Dependency and Indemnity Compensation provides tax-exempt monthly payments to surviving spouses, children, or dependent parents of troops who died during active duty, active duty training, or from service-connected disabilities.
Post-9/11 GI Bill and Montgomery GI Bill Education Benefits
Federal education programs pay tuition directly to academic institutions while providing monthly housing allowances and book stipends to eligible veterans and service members. The IRS excludes federal educational assistance payments from gross income calculations.
Department of Veterans Affairs Pension Payments
The Department of Veterans Affairs pension program offers tax-free supplemental income to low-income wartime veterans who meet age or permanent disability requirements.
The active duty death gratuity provides a tax-free payment of $100,000 to eligible beneficiaries of service members who die on active duty or active duty training. Federal tax law protects the full amount from federal income and estate taxes.
Servicemembers Group Life Insurance and Veterans Group Life Insurance
Life insurance payouts from Servicemembers Group Life Insurance and Veterans Group Life Insurance pass to designated beneficiaries tax-free upon the policyholder’s death. Life insurance death benefits remain excluded from federal gross income calculations.
Temporary Lodging Allowance and Temporary Lodging Expense
Temporary Lodging Allowance covers temporary housing and meal expenses overseas, while Temporary Lodging Expense covers temporary lodging costs in the United States during relocations. Both allowances reimburse moving expenses under military travel orders and are exempt from federal income tax.
Homeowners Assistance Program Benefits
The Homeowners Assistance Program provides financial relief to eligible service members facing losses when selling homes in areas affected by base closures or realignments. Payments made under this program qualify as non-taxable fringe benefits under federal tax guidelines.
Government Legal and Transportation Entitlements
Service members receive in-kind legal support from legal assistance officers and official government-provided transportation for military moves and travel. The IRS classifies these in-kind services as qualified military fringe benefits that generate no tax liability.
Taxable Military Benefits
Basic pay for active duty troops and Guard or Reserve members on drill status, with amounts depending on rank and time in service. DFAS disburses payments twice monthly and reports total annual earnings on Form W-2 in Box 1. Federal, state, and Social Security/Medicare taxes apply.
Aviation Incentive Pay and Flight Pay
Aviation Incentive Pay and Flight Pay compensate rated officers, flight surgeons, and enlisted aircrew performing regular flight duties. Amounts vary by aviation service years and flight status. These payments are taxable income.
Submarine Duty Incentive Pay
Submarine Duty Incentive Pay compensates naval troops serving on operational sub-surface vessels. Pay rates depend on rank and total time on submarine duty. The IRS counts these payments as taxable gross income.
Foreign Language Proficiency Bonus
The Foreign Language Proficiency Bonus goes to troops who maintain certified fluency in critical foreign languages. Members must pass annual testing to remain eligible. Monthly bonus payments count as taxable gross income.
Hazardous Duty Incentive Pay Outside Combat Zones
Hazardous Duty Incentive Pay compensates members performing dangerous non-flying tasks, including parachute jumping, demolition work, flight deck operations, and toxic fuel handling outside combat zones.
Hardship Duty Pay
Hardship Duty Pay provides additional monthly compensation to troops assigned to locations where living conditions fall substantially below standard levels. Rates depend on location severity or mission requirements. The IRS taxes these payments as gross income.
Special Duty Assignment Pay compensates enlisted personnel performing demanding duties or holding extraordinary responsibility, such as recruiting, drill instruction, combat control, or special operations. Monthly payments incur federal income and payroll taxes.
Career Sea Pay and Sea Pay Premium
Career Sea Pay compensates troops performing extended sea duty aboard military vessels. Sea Pay Premium provides additional monthly compensation after meeting cumulative sea time thresholds. Both payments are fully taxable under federal law.
Health Professional Special Pays
Military doctors, dentists, nurses, and veterinarians receive specialized bonuses and retention incentives, including accession bonuses, variable special pay, and board-certified pay. All medical special pays count as taxable gross income.
Enlistment and Reenlistment Bonuses
Enlistment and reenlistment bonuses assist in recruiting and retaining military personnel in critical occupational specialties. Bonuses arrive as lump sums or annual installments. DFAS withholds federal income tax at payment.
Hostile Fire and Imminent Danger Pay Outside Combat Exclusion Zones
Hostile Fire Pay and Imminent Danger Pay compensate troops subjected to hostile fire, explosion, or physical harm. If the Treasury Department has not designated the location as an official combat tax exclusion zone, these payments may remain fully taxable.
Accrued Leave Payouts
Troops earn 30 days of paid leave annually. When separating from the military or reenlisting, members may sell back up to 60 days of unused leave over their career. The resulting lump sum counts as earned income subject to federal tax withholding.
Longevity Retirement Pay
Longevity retirement pay provides monthly pension checks to military retirees completing 20 or more years of service. DFAS issues Form 1099-R annually. Pension payments incur federal income tax based on total annual earnings, but there are no Social Security payroll taxes.
Continental United States Cost of Living Allowance
The Continental United States Cost of Living Allowance compensates service members assigned to high-cost duty locations within the contiguous United States. Congress granted no statutory tax exemption for continental United States allowances. The IRS taxes these payments as gross income.
Non-Disability Severance Pay and Involuntary Separation Pay
Service members involuntarily separated from active duty before reaching retirement eligibility may receive lump-sum separation or severance payments. The federal government treats non-disability severance pay as earned compensation, and DFAS withholds federal income tax directly from the payout.
Differential Wage Payments
Differential wage payments occur when civilian employers continue paying salary to employees mobilized for active Guard or Reserve duty to cover the difference between civilian salary and military basic pay. Internal Revenue Code section 3401 classifies differential wages as taxable earnings reported on Form W-2.
Personally Procured Move Incentive Pay
When service members transport their household goods during a permanent change of station rather than using government movers, they participate in the Personally Procured Move program. If the government incentive payment exceeds actual qualified expenses, the remaining profit counts as taxable income.
Qualified Reservist Distributions
Qualified Reservist Distributions allow Guard and Reserve personnel called to active duty for more than 179 days to receive distributions from healthcare flexible spending accounts. The IRS taxes these funds as regular gross income because contributions occurred pre-tax.
About the author
Editor-in-Chief Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter/editor for Air Force Television News and the Pentagon Channel. His freelance work includes contract work for Motorola, VALoans.com, and Credit Karma. He is co-founder of Dim Art House in Springfield, Illinois, and spends his non-writing time as an abstract painter, independent publisher, and occasional filmmaker.
