Military Tax Basics

tax tips | November 09, 2017 | By Susannah McQuitty

A United States flag waves against a blue sky.

November has Veteran’s Day and Military Family Appreciation month to boot, so it’s time we showed our military some love, too.

Today we’re going to look at some basics on how taxes work for active-duty military personnel.

File your taxes as usual

The best news for military folks is that you don’t have to go through a particular process for taxes. You’ll get a Form W-2 like you would from any employer, and you can file your taxes online from anywhere you’re stationed.

You may even qualify for extra time to file your taxes. If you’ve been in a combat zone and it’s past the deadline to file, you generally have at least 180 days after leaving the zone to get that done without penalty.

The biggest differences between filing as civilian and filing as military include military-specific allowances (which are essentially automatic deductions that you don’t have to itemize to claim) and income exclusions. What’s an income exclusion, you ask? Let’s give it a look.

Some income doesn’t have to be included on your return

Some military service pay is not taxed at all. If it’s not taxed, it doesn’t have to be added to adjusted gross income (AGI) on your tax return. So what needs to be included and excluded?

Earnings for basic services (active duty, back wages, drills, etc.) and special pay (hardship duty, foreign duty, etc.) should be included in your gross income, along with bonus pay and incentive pay. On the other hand, earnings from active combat and moving allowances are often tax-free and should be excluded, at least in part, from your taxable income.

For a comprehensive list of income inclusions and exclusions, see pages 5 and 6 in the IRS Armed Forces Tax Guide.

State taxes for military personnel

You may be wondering how to pay state taxes when you have to move around so often. Well, the good news is that you don’t have to pay state taxes for every state you’ve lived in during the year. The military distinguishes what’s called your State of Legal Residency (SLR), and this is the only state you’ll have to file with for your military wages and earnings, even if it’s not the state you currently live in.

By default, your SLR is probably the same as the state you lived in when you enlisted, but you can change your SLR by filing a DD 2058 if you have the proper documentation to back up the change.

Now, if you’re also working freelance or civilian jobs on the side, you will have to file a non-resident state return for income earned in any state that’s not your SLR.

Don’t count on the foreign income exclusion

Some Americans who earn income overseas qualify for a foreign income exclusion, which reduces American taxes on those earnings. It’s important to note, however, that military wages and salaries don’t qualify for the foreign earned income exclusion. Even if you are technically earning money overseas, you’re being paid by the U.S. government instead of a foreign entity, so you still have to pay U.S. taxes.

Thank you!

Without the sacrifice made by you and your family, we would not be free or able to do what we love. To all our active-duty service members, veterans and reserves: Thank you for your service.

Want to know more about military taxes and tax breaks? Check out our Tax Guide!