Is Military Pay Tax Free?

Is Military Pay Tax Free?
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Although military pay at one time lagged behind civilian pay scales for similar skills and experience, the pay rates in the armed forces have gradually improved. Nevertheless, members of the military are subject to federal income taxes, just as civilians are, and in some states also subject to state-level income taxes.

Pay Grades

Every member of the military earns base pay according to their pay grade. E-level pay is for enlisted members, starting with E-1, while O-level pay is for officers. The pay gradually rises with promotions and experience. The armed forces also offer combat-zone pay, enlistment bonuses, and bonuses for specialized training.

Federal and Payroll Taxes

Military pay, no matter the type and amount, is subject to federal income tax, whether you are stationed in the United States or abroad. Members of the military must also pay Social Security and Medicare payroll taxes, which allow them to participate in the Social Security retirement and disability insurance programs, and enroll in Medicare when they reach the age to do so.

Tax-Free Combat Zone

Military personnel serving in a combat zone are exempt from federal income taxes on their base pay, combat pay, and bonuses. Pay in such a zone is still subject to Social Security and Medicare payroll taxes. Only the maximum enlisted pay is exempt; officer pay over and above enlisted pay is still subject to federal taxes. The tax exemption is counted by months, so that anyone serving at least a day is exempt for the entire month.

State Income Taxes

The states have their own laws regarding military pay. In Colorado, which is typical, the income-tax law varies whether you are a resident or nonresident. Members of the military on active duty, and who are stationed in the state long enough to be considered residents, are taxed at the same rate as civilians. Nonresidents do not have to pay state income tax on their military pay, but they must pay tax on nonmilitary income earned within the state. The state also allows military personnel 55 years or older to exclude $20,000 of their pay from state income tax.

Retirement Pay

Military retirement pay is also subject to federal taxes, following the IRS rules for those receiving pensions, and for those over (or under) age 65. The military will withhold money from retirement checks according to the number of exemptions you claim on your tax return.