Military Tax Guide for Active Duty Members and Veterans

Combat Zone Tax Exclusions (CZTE)

Income earned while serving in a designated combat zone is exempt from federal income tax and does not need to be included in gross income. This tax exclusion applies to base pay, reenlistment bonuses and special pay, including imminent danger or hostile fire pay. 

Enlisted members and warrant officers can exclude all income earned in the combat zone, while commissioned officers can exclude income up to the highest enlisted pay rate plus imminent danger pay. The exclusion also extends to pay earned during leave if the leave begins while still in the combat zone.

Deadline Extensions

Military members deployed in combat zones or contingency operations qualify for automatic tax filing extensions. While the extensions defer deadlines for filing returns and paying taxes, these benefits also prevent penalties or interest on late filings. This ensures service members have the time needed to address tax responsibilities after deployment.

Military members, including those serving in combat zones or contingency operations, qualify for automatic extensions on tax deadlines. These extensions provide additional time to file returns and pay taxes, deferring deadlines while preventing penalties or interest on late submissions. Verify your eligibility and applicable deadlines to make the most of this benefit.

Death Benefits

The $100,000 death gratuity paid to survivors of deceased Armed Forces members is entirely tax-free. This includes payments for burial expenses and other associated costs. Beneficiaries do not need to report these payments as income on their tax returns.

Sale of Principal Residence

Special tax rules may apply if you’re selling a principal residence due to military relocation. Service members can suspend the standard five-year ownership and use the test for up to 10 years during extended duty assignments. This provision helps avoid or reduce capital gains tax when selling a home after relocating for service.

Deduction for Overnight Travel Expenses of National Guard and Reserve Members

Unreimbursed travel expenses for overnight stays more than 100 miles from home are deductible and treated as an above-the-line deduction, meaning you can claim them even if you don't itemize. These deductions reduce taxable income and cover transportation, meals and lodging. Be sure to use Form 2106 to calculate eligible amounts.

Department of Defense (DoD) Homeowners Assistance Program (HAP)

Payments received through the DoD HAP are excluded from taxable income. This program helps service members affected by base realignments and closures, offering tax-free compensation for reduced property values. These payments are exempt from Social Security and Medicare taxes.

Military Academy Attendees

Cadets attending U.S. Military, Naval, Air Force, Coast Guard or Merchant Marine academies benefit from special tax provisions. Withdrawals from Qualified Tuition Programs or Coverdell Education Savings Accounts used for education expenses are exempt from the 10% penalty. These withdrawals remain untaxed, provided they don’t exceed education costs.

Uniform Deduction

You can deduct the cost and upkeep of certain uniforms unsuitable for off-duty wear, provided these expenses are not reimbursed. To calculate your deduction, subtract any uniform allowance you received from the total expenses incurred. Keep receipts and records to support your claim.

Earned Income Tax Credit (EITC)

The EITC benefits low- to moderate-income workers, including military members. Although combat pay is nontaxable, you can include it as earned income for EITC purposes, which may increase your credit amount. Eligibility and credit amounts vary based on income, filing status and the number of qualifying children.

Reservists' Travel Deduction

Reservists traveling more than 100 miles from home for reserve duties also can deduct unreimbursed travel expenses. This deduction is available even if you do not itemize your deductions. To claim this benefit, maintain proper documentation, such as receipts and mileage logs. Then, file Form 2106 with your tax return.

Moving Expense Deduction

Active-duty members relocating due to a Permanent Change of Station (PCS) can deduct unreimbursed moving expenses, such as travel, lodging and transportation of household goods. Use Form 3903 to claim this deduction when filing your taxes.

Signing Joint Returns

Joint filing allows military couples to benefit from lower tax rates, higher deductions and access to credits like the EITC or Child Tax Credit, which may not be available when filing separately. If you or your spouse is unable to sign a joint return due to deployment, you can authorize a power of attorney using Form 2848 or include a signed statement granting permission.

Military Retirement Pay

According to the IRS, military retirement pay is taxable income, requiring veterans to include it in their gross income for federal tax purposes. While federal income tax applies, state tax treatment of military retirement pay varies: some states fully exempt it, others partially exempt it and a few tax it entirely.

Although classified as a pension rather than wages, military retirement pay is not subject to Social Security and Medicare (FICA) taxes. This means retirees pay federal income tax on their retirement pay but are exempt from FICA taxes.

Survivors Benefit Plan (SBP)

The SBP is an optional insurance program for military retirees that provides monthly payments to designated beneficiaries after the retiree's death. If enrolled in SBP, your premiums are automatically deducted from your retirement pay before taxes are applied. This means your SBP premiums are tax-free and reduce your taxable income. The payments received by your beneficiaries are also exempt from federal income tax, offering additional financial relief for your family.

Military Disability Retirement Pay

Military disability retirement pay, compensation for a service-related disability, is excluded from taxable income and does not count toward your gross income. This includes payments in annuities, pensions or other disability-related compensation.

If the Department of Veterans Affairs (VA) grants you retroactive disabled status, you may be eligible to claim a refund on taxes previously paid on amounts that should have been tax-exempt. To do this, you will need to file an amended tax return for each affected year.

To qualify for disabled veteran status with the VA, your disability must meet one of these criteria:

• Resulted from an injury or sickness incurred during service.
• Was aggravated or worsened during military service.
• Is determined to be directly related to your service by the VA.

Housing Grant Tax Status

The VA offers housing grants such as Specially Adapted Housing (SAH) and Special Housing Adaptation (SHA) grants to veterans with service-connected disabilities to help them purchase or modify homes to meet their needs. These funds are excluded from taxable income, ensuring that financial assistance for adapted living conditions does not increase your tax obligations.

Compensated Work Therapy (CWT) Program

Payments received from the VA's CWT Program, also known as Veterans Industries, are entirely tax-free and do not need to be reported as taxable income. This includes payments from the Transitional Work Program, which are also excluded from gross income. The CWT Program at VA medical centers helps veterans restore physical and psychological well-being while preparing for competitive employment opportunities.

Life Insurance

Proceeds from VA life insurance policies are generally tax-free, including interest income earned on installment payments. However, if the proceeds are left to an estate, they may be subject to estate taxes as part of its value.

For example, a veteran's beneficiary receiving life insurance proceeds in 36 equal monthly payments would not pay taxes on the included interest. Exceptions apply only when the proceeds contribute to a taxable estate.

Education and Training

Programs like the Post-9/11 GI Bill®, Yellow Ribbon Program and Montgomery GI Bill provide military members with tax-free allowances for tuition, housing and other related expenses, ensuring these benefits do not increase their taxable income. Additionally, military members may qualify for several tax credits and deductions to offset education costs.

The American Opportunity Tax Credit (AOTC) offers a credit of up to $2,500 per eligible student for the first four years of post-secondary education, while the Lifetime Learning Credit (LLC) provides up to $2,000 per tax return for qualified tuition and related expenses. These tax benefits can complement GI Bill assistance, potentially providing even greater savings on education expenses.