Welcome to Tax Week, a weeklong series of guides and resources for the 2025 tax season.
Active-duty military service members and their families can generally rely on a fundamental rule of the taxation of military pay and allowances: The U.S. federal government taxes military pay, such as basic pay, and doesn't tax allowances, such as the Basic Allowance for Housing (BAH), with only a few exceptions.
U.S. states and territories, on the other hand, may exclude military pay from a legal resident's taxable income, and many also exclude all or a portion of military retirement income. Our guide provides more details of the state-by-state rules.
Here are the military and veteran pays and allowances you may or may not need to pay taxes on:
Active Duty: Exceptions to the Norms
These military pays and allowances don't adhere to the rule that the U.S. federal government taxes pay and doesn't tax allowances.
Pay received in a combat zone: NOT TAXED. Aside from Social Security and Medicare taxes, service members deployed to a combat zone, who meet all the requirements, don't pay any other federal income taxes on the pay they receive while there, including basic pay, reenlistment or continuation bonuses, imminent danger/hostile fire pay and leave benefits. The amount paid in student loan repayments may also be excluded while in a combat zone.
CONUS COLA and the Basic Needs Allowance: TAXED. Allowances had historically been tax exempt when a law said any created after 1986 had to be taxed. The military began paying troops in high-cost areas around the U.S., such as New York, the Continental United States Cost-of-Living Allowance (CONUS COLA) in 1995, and it became the first taxable allowance. The Defense Department implemented the Basic Needs Allowance in 2023, which is designed to bring the income of a service member up to 150% of the poverty level for their family size, and it is also taxable.
PCS moving expenses: NOT TAXED. If a service member on permanent change-of-station (PCS) orders incurs certain expenses directly related to moving, storage and travel, which the military doesn't reimburse, those unreimbursed costs may be excluded from the service member's federal taxable income.
Veterans and Survivors: What's Taxed and What's Not
Veterans who receive a variety of pays as a result of their military service could avoid big federal or state tax bills, depending on whether they served all the way to retirement, received education benefits, have a service-connected disability or live in a state with special rules.
VA disability pay: NOT TAXED. No states nor the federal government taxes disability payments from the U.S. Department of Veterans Affairs. (This is unlike the federal government's practice of taxing Social Security disability, on the other hand, which is taxed above a certain income threshold.)
Military retirement pay: TAXED. Although many states have exempted it all or in part, the federal government taxes military retirement pay. If you need to change your withholding amount, call the Defense Finance and Accounting Service at 800-321-1080 or the Coast Guard Pay and Personnel Center at (866) 772-8724.
Survivor Benefit Plan Payments: TAXED. Military retirees who contribute a portion of their retirement pay to Survivor Benefit Plan (SBP) coverage can exclude the premiums from their federal taxable income, but when their beneficiaries begin to collect lifetime annuity payments, the federal government taxes it similarly to military retirement income, and states often combine military retirement and SBP payments in the same policy.
VA education benefits: NOT TAXED. GI Bill payments are tax free for veterans or any dependents or survivors who may receive the benefits. The tax-free payments include money for tuition, training, testing for licenses and certifications, tutoring, work study, books and housing.
Other VA benefits: NOT TAXED, The federal government also doesn't tax a number of other income benefits veterans may receive from the VA, including:
- Combat-related special compensation
- VA grants to modify a home
- Interest from VA life insurance policies
- VA dependent-care assistance
- VA post-9/11 survivor benefits
- Income received in the VA Compensated Work Therapy program
Where to Find More Information
The IRS's Publication 3, Armed Forces' Tax Guide includes many more details relevant to military households (the updated 2024 guide was not posted by publication time).
Other Tax Week stories:
- State Tax Filing Options for Military Households: What You Need to Know
- What Military and Veteran Households Need to Know for This Year's Tax Filing and Beyond
- The Best Military Discounts on Tax Preparation
- How Military Households Can Avoid Unexpected Costs When Filing Their First Civilian Taxes
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