The Complete Guide to Military Tax Benefits You Should Be Using

Military service comes with financial challenges, but also significant tax advantages that many service members overlook. Understanding and utilizing these benefits can save thousands of dollars annually and accelerate your wealth-building efforts. This guide covers the key tax benefits available to service members and their families.

Tax-Free Allowances

Your Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are not subject to federal income tax. This tax-free status effectively increases the value of these allowances compared to equivalent taxable income.

Consider an E-6 receiving $2,000 monthly in BAH. If this were taxable income in the 22% bracket, $440 would go to federal taxes. Instead, the full amount supports your housing costs. Over a 20-year career, this tax-free treatment represents tens of thousands in savings.

Other tax-free payments include family separation allowance, hazardous duty pay in certain circumstances, and various special pays depending on assignment.

Combat Zone Tax Exclusion

Service members deployed to designated combat zones receive substantial tax benefits. All military pay earned during combat zone deployment is excluded from federal income tax for enlisted members and warrant officers. Officers can exclude pay up to the highest enlisted pay rate plus imminent danger pay.

Combat zone benefits extend beyond income exclusion. Deadlines for filing returns and paying taxes are suspended during deployment and for 180 days after leaving the combat zone. This provides flexibility without penalties.

Additionally, income earned in combat zones can still be contributed to Roth retirement accounts despite not being taxed. This creates a unique opportunity to make tax-free contributions that will grow and be withdrawn tax-free in retirement.

Moving Expense Deduction

While most Americans lost the ability to deduct moving expenses after 2017, active duty military members moving due to permanent change of station orders retain this deduction. Qualifying expenses include transportation and storage of household goods, travel to the new duty station, and lodging during the move.

Keep detailed records of all moving-related expenses not reimbursed by the military. Mileage for driving your personal vehicle, rental trucks for items moved yourself, and temporary lodging costs all potentially qualify. These above-the-line deductions reduce your adjusted gross income directly.

State Tax Considerations

The Servicemembers Civil Relief Act allows military members to maintain their legal residence in one state regardless of where they’re stationed. This means you can remain a legal resident of a state with no income tax (like Texas, Florida, or Nevada) even while stationed elsewhere.

Choosing your state of legal residence strategically can save thousands in state income taxes over a career. However, this decision involves factors beyond taxes, including vehicle registration, voting, and eventual veteran’s benefits. Research thoroughly before establishing or changing your legal residence.

Military spouses also received relief through the Military Spouse Residency Relief Act, allowing them to maintain the same legal residence as their service member spouse for tax purposes.

Education Benefits and Taxes

GI Bill benefits used for qualifying education expenses are tax-free. This includes tuition, fees, books, and housing allowance payments. However, understanding how these interact with education tax credits requires attention.

You cannot claim the American Opportunity Tax Credit or Lifetime Learning Credit for expenses paid with tax-free GI Bill funds. However, if your education expenses exceed your GI Bill benefits, the difference may qualify for these credits. Strategic timing of education expenses can maximize total benefits.

TSP and Retirement Contributions

The Thrift Savings Plan offers both traditional (pre-tax) and Roth (after-tax) contribution options. In combat zones, Roth contributions become particularly powerful since you’re contributing money that was never taxed and will never be taxed on withdrawal.

Military members can also contribute to the TSP’s catch-up contributions if over 50, and combat zone deployment increases annual contribution limits. Understanding these rules helps maximize retirement savings tax efficiency.

Property Tax Exemptions

Many states offer property tax exemptions or reductions for active duty service members and veterans. These vary significantly by state and often depend on disability rating, service dates, or other factors. Research your state’s specific benefits, as they can provide substantial ongoing savings.

Free Tax Preparation Resources

The military provides free tax preparation through the Volunteer Income Tax Assistance (VITA) program on most installations. Military OneSource offers free tax filing software to service members and their families. These resources include expertise in military-specific tax situations that general preparers may miss.

Taking Action

Review your tax situation annually, not just at filing time. Keep records of all potentially deductible expenses throughout the year. Consider consulting a tax professional familiar with military tax benefits, especially for complex situations involving combat pay, investments, or state residency questions.

The tax code provides meaningful benefits to service members. Using them fully is simply smart financial management.