Welcome to Tax Week, a weeklong series of guides and resources for the 2025 tax season.
When it comes to taxes, military households aren't any better or worse at staying on top of their obligations than civilians. But according to Military Tax Experts Alliance President Jerry Zeigler, the consequences of getting behind on withholdings or not being aware of the relevant tax laws can affect military households more severely, he said, especially when they're transitioning to civilian life.
When a service member retires but goes to work in the civilian workforce, that extra income can add up to surprisingly large balances at tax time, Zeigler told Military.com. Additionally, the capital gains from a property sale or a disbursement from an investment, for example, might be better to take while still in uniform than after -- or vice versa. And when one spouse enters the workforce for the first time, a common wrong assumption might lead the couple to withhold too little and face an unexpected bill from the IRS.
Here's what military service members can do to reduce the likelihood of unpleasant errors in their first year of filing taxes as a civilian.
Related: State Tax Filing Options for Military Households: What You Need to Know
Actively Manage Withholdings and Estimated Taxes
Service members who received tax refunds their whole careers may not realize they need to start managing how much gets withheld from their paychecks for taxes.
Civilian Job
Particularly in the cases of people who might have served longer and fetch a higher salary when they get out -- placing them in a higher tax bracket -- owing a substantial chunk of money might come as a surprise.
"If they've been getting refunds their entire six years, eight years, 20 years, whatever it is, they're not used to making those adjustments," Zeigler said. "So when they go for that first job, they put what just makes sense on that W-4 [withholding form], but it might not make sense from a tax perspective."
For example, spouses with two kids might not realize that if they both withhold at the rate of a married person with two children, they could come up short and owe taxes.
Retirement Pay
Military retirees who served long careers and go on to high-paying jobs afterward also could find that their retirement pay puts them in a higher tax bracket.
For retirees who keep working as civilians, Zeigler has a simple rule: Assuming that your withholdings at your civilian job are squared away, figure out your likely marginal tax rate and withhold that percentage from your retirement pay.
"If you're not going to sit down and do all the calculations ahead of time -- you don't have a tax pro who's going to do that for you, or you're not going to do it yourself -- the default should be to just withhold your marginal rate for federal and for state, if there's a state income tax," he said.
Zeigler recommended the IRS's Tax Withholding Estimator to get a general idea. Alternatively, you can roughly gauge your taxable income and look up the rate on a prior year's tax table.
"I haven't really met anybody who likes withholding a bunch of taxes from their retirement pension," Zeigler acknowledged. "But it keeps you out of trouble."
Brush Up on Capital Gains Tax Rules
Certain tax rules, along with circumstances common among military households, may amount to a benefit in terms of capital gains, but other situations could result in an unpleasant surprise.
Investment Income
If a transitioning service member takes a disbursement from an investment fund, for example, to buy a home after leaving the military, doing so while still in uniform -- or waiting until after, depending on the circumstances -- might have an advantage.
But it also presents a pitfall.
"In most cases, people don't withhold or pay estimated taxes on it," Zeigler explained, meaning they may owe thousands at tax time, depending on how much they withdrew.
And if they're moving from Texas to California (or vice versa), taking out the money and paying the taxes on it while a Texan could prevent them from having to pay state income tax on the gains, since Texas doesn't have a state income tax.
Related: The Best Military Discounts on Tax Preparation
Sale of Rental Property
The concept of receiving capital gains at the most strategic moment tax-wise may also apply to selling a home.
At the same time, military households should be aware that the so-called "two-out-of-15" rule, allowing them to exclude gains from the sale of a primary residence, may not be as straightforward as they thought, Zeigler said.
Military members must have lived in a home for two out of the 15 years prior to the sale in order to potentially qualify to exclude at least a portion of the gains from their taxable income. Individuals who meet all the requirements can deduct up to $250,000 of the profits from such a sale, and spouses filing jointly can deduct up to $500,000.
But ultimately, they may not qualify to deduct as much as they think because of other rules, Zeigler said.
One example: A homeowner may have received a tax benefit while renting out a house because rental properties are presumed to depreciate, and the amount of the depreciation is deductible. But then when selling the house, the homeowner might discover that it didn't actually lose value, or depreciate, so they have to pay back that earlier advantage.
"Then they might have a huge tax bill if they have a lot of gain," Zeigler said.
Figure Out How to Make a Tax Projection
Neither military members nor civilians tend to manage their withholdings or estimated taxes as well or frequently as Zeigler would like. But he thinks the taxes can affect military households more severely, especially "when they're making that transition," he said.
"Whenever you have big income changes, and whenever you have big tax situation changes, it's a good idea to actively manage that, which means doing some kind of projections" of what you'll owe, Zeigler said. The objective is to pay enough in withholdings and estimated taxes to avoid owing anything for the year.
Zeigler wasn't aware of any common tax software that offered a planning feature. The IRS's Tax Withholding Estimator allows users to account for some of the factors that often trip up military households in transition, such as whether a spouse will also be working and the expectation of investment income.
Another method to get a ballpark estimate could be to go into any tax software they may have recently filed with and -- after downloading and saving and copies, forms, or other documentation -- substitute their expected income. Last year's software should still provide a reasonably good estimate.
"Just don't file a tax return or an amended return," he warned.
Related: What Military and Veteran Households Need to Know for This Year's Tax Filing and Beyond
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