Do Military Personnel Pay Taxes While Deployed? Tax Guide

Did you know over 1.3 million active duty military personnel are stationed within the country and overseas? While being an active duty service member grants you many privileges, it doesn’t exempt you from paying federal income taxes. However, there may be instances where your military pay isn’t subject to federal income tax. Our Armed Forces tax guide will help provide some clarification.

Do Service Members Pay Taxes?

Yes, deployed service members are required to pay income taxes based on the state they’re stationed in. The Department of Defense (DoD) helps them file tax returns to ensure they aren’t penalized.

What Military Income is Subject to Federal Income Tax?

You’re not required to pay income tax on all the compensation you receive as a military member. In short, your basic pay, bonuses, and special pay are considered taxable income, while your reimbursements, allowances, and in-kind benefits aren’t subject to taxes.

The following compensation a soldier receives is subject to taxes:

• Basic pay: This includes your gross income and enlisted pay, but services performed in a combat zone are exempt from taxes. Basic pay also covers the money you receive for active duty service, attendance at reserve training, drills, or specific service schools.
• Bonuses: Unless earned while serving in a combat zone, bonuses are taxable.
• Special pay: This monthly compensation is provided to those who perform specific military duties. Like your basic pay, it may be taxed.

All About Combat Zone Tax Exclusion (CZTE)

One of the most important military tax benefits is the Combat Zone Tax Exclusion (CZTE). You’re granted tax advantages if you serve in a combat zone.

But what is considered a combat zone? Combat zones are areas where U.S. Armed Forces are in combat as designated by the president’s Executive Order.

As an active duty service member, you can exclude income earned during a period when:

• You’re deployed in a combat zone.
• You’re hospitalized due to injuries sustained in a combat zone.

This exclusion applies for the entire month or part of the month you served in the combat zone. You’re eligible only if you were officially assigned to the area or caught in imminent danger while there.

However, this exclusion doesn’t apply for hospitalizations that occur more than two years after serving in a combat zone. It also doesn’t cover periods when you’re on leave while stationed there.

For enlisted members, warrant officers, and commissioned warrant officers, your full military pay can be deducted from your gross income. For commissioned officers, the exclusion is capped at the highest pay for enlisted personnel plus imminent danger pay.

To make this tax benefit official with the IRS, ensure that Box 1 of Form W-2 does not include the exempted military pay. If it does, you’ll need a corrected Form W-2 from your finance office.

What to Know About Tax Filing While Deployed

If you’re a service member or someone filing on behalf of one, here are some important things to keep in mind:

• Access your tax statements online: Your myPay account provides access to your military W-2 form, which is available online before it’s sent to you by mail. You’ll need your common access card or personal identification number to log in.
• Gather essential documentation: This includes receipts for child-care expenses, 1099 forms, last year’s tax return, deductions, credits, and any documents related to mortgages, investments, or rental properties. You’ll also need your military ID, family members’ Social Security numbers, and bank account details for electronic filing.
• Choose where to file your taxes: The Servicemembers Civil Relief Act (SCRA) allows you and your spouse to choose between your domicile state and permanent duty station when filing taxes.
• Ensure a power of attorney if someone else is filing your taxes: If your spouse or another person is handling your taxes, make sure you provide all necessary information and a power of attorney to authorize them to make financial decisions for you. They’ll also need to include IRS Form 2848 with the tax return.

Tax Benefits and Tips for Military Incomes

Proper planning is crucial to ensuring you pay your taxes on time and make the most of the benefits available to active duty personnel. Here are some helpful tips to keep in mind before tax season:

• Check if your state taxes military income: States like Oklahoma, Missouri, New Mexico, and Arkansas offer military tax exemptions, while others may have different rules for taxing military pay.
• Confirm eligibility for tax credits: For example, depending on the number of dependents you have, you may qualify for income tax credits. Be sure to check if you qualify based on the most recent tax laws.
• Deduct moving expenses: If you’re permanently assigned to a new base, you may deduct unreimbursed moving expenses. This benefit also applies to reservists who travel more than 100 miles for active service.
• Keep detailed records of expenses while deployed: Whether stationed overseas or in the U.S., keeping track of your expenses may help reduce your tax obligations.
• Seek help when needed: For questions about earned income tax credits or other tax matters, you can use the IRS’s Volunteer Income Tax Assistance (VITA) service, which is free.

Final Words

Your military compensation is subject to taxes whether you’re deployed overseas or not. However, the SCRA gives you the option to choose where to pay state taxes. You’ll need proof of military service to maximize SCRA benefits, and SCRACVS can help you quickly obtain this information. Click here to sign up at SCRAVS and verify the active duty status.

FAQs

Do I have to pay state taxes while deployed?

Yes, deployed service members are required to pay state taxes. However, the SCRA allows you to choose the state where you file taxes.

How do I file taxes while stationed overseas?

You’re eligible for extensions while stationed abroad. You can file your taxes online or authorize your spouse or another person with a power of attorney to handle tax-related matters.

Do the US military pay taxes while deployed?

Yes, unless you’re deployed to a combat zone, your military pay is subject to U.S. taxes.

Do active US military pay taxes?

Yes, all taxable income is subject to taxes unless you’re serving in a combat zone.

Do US soldiers have access to their money while deployed?

Yes, you can access your money online and withdraw it via an ATM card or by visiting a bank.