Chicoine & Hallett, P.S., lawyers in Seattle, WA, Washington

Taxability of Military Pay

In general, if you are a member of the U.S. Armed Forces, your pay is included in gross income for federal income tax purposes. Basic pay includes amounts paid as back wages and amounts paid for services performed during active duty, attendance at designated service schools, drills, reserve training, and training duty. Special pay, including amounts received by medical and dental officers, nuclear-qualified officers, and amounts paid for services performed during diving duty, foreign duty, hostile fire, imminent danger, and special duty assignment must also be included in gross income. In addition, if you receive bonuses for enlistment and reenlistment, payments for accrued leave, muster out payments, personal money allowances paid to high-ranking officers, and certain scholarship and student loan repayments, you must include them in gross income.

However, the combat pay of enlisted persons and part of the combat pay of commissioned officers may be excluded from gross income. This exclusion applies to compensation received by members of the U.S. Armed Forces for any month during which they served in a combat zone or in certain designated hazardous duty areas. It also applies to compensation received by military personnel who are hospitalized due to disease or injuries incurred while serving in a combat zone or a designated hazardous duty area.

Commissioned officers may only exclude from gross income the maximum amount of combat pay excluded from the pay of enlisted personnel. This excludable amount is the highest rate of basic pay at the highest pay grade for enlisted personnel plus any special hostile fire or imminent danger pay that the officer receives.

As a member of the Armed Forces, you probably receive many kinds of allowances and benefits to help fill your housing, subsistence, and other needs. Allowances for subsistence, quarters, travel, and moving furnished to you as a commissioned officer, chief warrant officer, warrant officer, or enlisted personnel of the Armed Forces, Coast and Geodetic Survey, or Public Health Service are not taxable income. Housing and cost-of-living allowances received by Armed Forces members to cover the excess cost of quarters and subsistence while on permanent duty at a post outside the U.S. are excludable from gross income, as are family separation allowances received on account of overseas assignment. The fact that a member of the military service, Coast and Geodetic Survey, or Public Health Service receives a tax-free housing allowance will not bar a deduction for mortgage interest or real property taxes on the member's home.