Think of military tax benefits as the government’s way of saying “thanks for your service”—but in dollars and cents instead of just words.
These benefits are special provisions written into federal and state tax laws that recognize the unique sacrifices military members make. They cover everything from tax-free allowances to automatic filing extensions when you’re in a combat zone.
The cool part? Many of these benefits apply whether you’re enlisted or an officer, active duty or reserves, stationed stateside or deployed overseas. Some even extend to your spouse and dependents.
The Big Three Categories
Income Exclusions: Certain types of military pay never get taxed in the first place. Ever.
Deductions: Expenses you can subtract from your taxable income, lowering what you owe.
Credits: Direct reductions in your tax bill. These are gold because they cut your taxes dollar-for-dollar.
Combat Pay: The Tax Exemption That Actually Matters
Here’s where things get interesting. If you’re serving in a designated combat zone, your combat pay is completely exempt from federal income tax. Not “reduced.” Not “partially taxable.” Completely. Tax. Free.
The IRS designates combat zones by executive order—places like Iraq, Afghanistan, and other qualifying areas. When you’re in one of these zones, every dollar of pay you earn while you’re there is excluded from your taxable income.
You’ll see this reflected on your W-2 form at the end of the year. Your combat pay shows up separately in Box 12 with code “Q,” so you know exactly how much tax-free income you earned.
Pro tip: Even though combat pay is tax-exempt, you can choose to include it when calculating your Earned Income Tax Credit (EITC). Why would you do that? Because it might actually increase your credit and put more money back in your pocket. It’s worth running the numbers both ways.
BAH and BAS: The Allowances Nobody Taxes
Let’s talk about the two allowances that make military life a bit more manageable: Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS).
Here’s the beautiful thing—neither one is taxable.
BAH covers your housing costs, and the amount varies based on your rank, location, and whether you have dependents. Whether you’re getting $1,500 or $3,500 a month, Uncle Sam doesn’t touch it.
BAS helps cover food expenses. Again, completely tax-free.
These aren’t “benefits” you need to claim or deductions you need to calculate. They simply don’t count as taxable income, period. The military already knows this, so these amounts won’t even show up on your W-2 as taxable wages.
Think of it this way: if your base pay is $50,000 and you receive $20,000 in BAH and $5,000 in BAS, you’re only paying taxes on that $50,000—even though your total compensation is $75,000.
Filing Extensions for Deployed Personnel: Breathe Easier
Tax Day is April 15th for most Americans. But if you’re serving in a combat zone? You get an automatic 180-day extension after you leave the combat area.
No forms to file. No permission to request. It’s automatic.
This extension applies to everything—filing your return, paying any taxes you owe, even making IRA contributions. And it covers your spouse too if you file jointly.
Here’s an example: If you leave a combat zone on June 1st, your tax deadline becomes November 28th (180 days later). That’s more than seven months after the regular deadline. Managing your money during deployment is challenging enough without worrying about tax deadlines.
The extension also suspends any interest or penalties that would normally accrue. So you’re not being charged for taking the extra time you legitimately need.
Deductions Military Members Can Actually Use
Unlike most employees who lost the ability to deduct work expenses after tax law changes in 2017, military members still have some legitimate deductions available.
Moving Expenses
If you’re relocated due to military orders—known as a Permanent Change of Station (PCS)—you can deduct unreimbursed moving expenses. This includes:
- Transportation costs for you and your family
- Shipping household goods
- Travel expenses to your new duty station
- Temporary storage costs
The key word here is “unreimbursed.” If the military already paid for something, you can’t deduct it again. But any out-of-pocket costs? Fair game.
Uniform Maintenance
You can deduct the cost of maintaining your uniforms—cleaning, alterations, repairs—if you’re not reimbursed by the military. You can’t deduct the initial purchase price (that’s considered personal expense), but keeping them clean and serviceable counts.
There’s a catch though: these uniform maintenance costs have to exceed 2% of your adjusted gross income to be deductible. Still, if you spend a few hundred dollars a year on dry cleaning dress uniforms, it adds up.
Travel Expenses for Reservists
Reservists get a special break. If you travel more than 100 miles from home for drill, training, or meetings, you can deduct your travel expenses. This includes:
- Mileage (at the standard IRS rate)
- Lodging costs
- Meals (50% deductible)
Unlike regular employees who need to itemize deductions, reservists can take these as an above-the-line deduction—meaning you can claim them even if you take the standard deduction. That’s a big deal because most people now use the standard deduction.
State Taxes: The Residency Puzzle
Here’s where things get tricky. Your state of legal residence determines which state taxes your military pay.
The good news? Many states partially or fully exempt military income from state taxes. Some states like Alaska, Florida, Nevada, Texas, and Washington have no state income tax at all. Others offer full exemptions for active-duty military pay.
But what happens when you’re stationed in California but your home of record is Texas? Generally, you continue paying taxes (or not paying them) based on your state of legal residence—not where you’re currently stationed.
The Military Spouses Residency Relief Act (MSRRA)
This is huge for military families. MSRRA allows a military spouse to maintain their home state residency for tax purposes, even when they move to a different state because of their service member’s orders.
Let’s break this down: Say you’re from Florida (no state income tax) and your spouse gets stationed in Virginia (which does have state income tax). Under MSRRA, you can keep your Florida residency and avoid Virginia state taxes—as long as you maintain that Florida residency.
The act prevents the nightmare scenario of military spouses paying state taxes in multiple states just because they followed their service member from base to base.
Requirements to use MSRRA:
- You must be in the state solely to be with your service member spouse
- Your spouse must be there under military orders
- You and your spouse must have the same state of residence
This also extends to other areas like vehicle registration and driver’s licenses, making PCS moves slightly less chaotic.
Tax Credits That Put Money Back in Your Pocket
Credits are better than deductions. Why? Because they reduce your actual tax bill dollar-for-dollar, rather than just reducing your taxable income.
Child Tax Credit (CTC)
Military families with qualifying children can claim up to $2,000 per child under age 17. Part of this is even refundable, meaning if the credit is larger than your tax bill, you can get the difference as a refund.
Combat pay can be included when calculating this credit if it benefits you—just like with the EITC.
Earned Income Tax Credit (EITC)
This credit is designed for low-to-moderate income working families. The amount varies based on your income and number of qualifying children, but it can be substantial—up to several thousand dollars.
Here’s the military advantage: You can elect to include your nontaxable combat pay when calculating your income for this credit. Sometimes including that tax-free pay actually increases your credit because it bumps you into a better EITC bracket. It’s counterintuitive, but run the numbers both ways.
Dependent Care Credit
If you pay for childcare so you and your spouse can work, you may qualify for the Dependent Care Credit. This covers daycare, babysitters, and after-school programs for kids under 13.
Military families face unique challenges with childcare costs, especially during deployments or training exercises, making this credit particularly valuable.
Veterans and Retirement Pay: What’s Taxable?
Active duty is one thing. But what about when you retire or transition to veteran status?
Military retirement pay is generally taxable at the federal level. Yes, you paid your dues, but the IRS still wants its cut. However, many states offer full or partial exemptions for military retirement income, so your state tax situation might improve significantly in retirement.
Disability compensation from the VA is completely tax-free. If you receive VA disability payments, those are yours free and clear—no federal or state taxes.
Here’s where it gets nuanced: If you’re receiving both retirement pay and disability compensation, the portion of your retirement pay that’s offset by VA disability (called the VA waiver) is also tax-free.
For example, if you receive $2,000 monthly in retirement pay and $800 in VA disability, and that $800 reduces your retirement pay dollar-for-dollar, then you’re only paying taxes on $1,200 of retirement income.
Combat-Related Special Compensation (CRSC) and Concurrent Retirement and Disability Pay (CRDP) are also tax-free when they’re related to combat injuries or disabilities.
Free Tax Help: You’re Not Alone in This
The military community has your back when it comes to taxes. Several resources offer free, expert assistance:
Military OneSource MilTax Program
This is the gold standard for military tax help. MilTax provides:
- Free tax software (compatible with federal and state returns)
- Access to tax consultants who understand military-specific situations
- Resources and guides tailored to military life
The best part? The consultants actually know military taxes. They won’t be confused by your combat pay exclusion or PCS move deductions.
Volunteer Income Tax Assistance (VITA)
Many military bases host VITA centers during tax season. IRS-certified volunteers prepare tax returns for free, and they’re trained on military tax issues.
These centers prioritize service members and their families, so you won’t be competing with the general public for appointments.
IRS Publication 3: Armed Forces Tax Guide
This is the IRS’s official guide to military taxation. It’s surprisingly readable (for an IRS document) and covers just about every scenario you might encounter. Download it free from the IRS website.
Want more financial guidance? Check out our comprehensive budgeting strategies to maximize your military income.
Special Situations and Lesser-Known Benefits
Deadline Extensions for Training and Emergencies
Beyond combat zone extensions, you can get filing extensions if you’re:
- Serving in a contingency operation
- Hospitalized for combat-related injuries
- Deployed for a humanitarian or peacekeeping mission
Each situation has specific rules, but the IRS recognizes that military service doesn’t always fit neat tax deadlines.
Selling Your Home
Military members get special treatment under the home sale capital gains exclusion. Normally, you must live in your home for two of the five years before selling to exclude up to $250,000 ($500,000 for married couples) in capital gains.
But if you’re forced to sell due to military orders, you can suspend that five-year test period for up to 10 years while you’re on qualified extended duty. This prevents you from losing the exclusion just because Uncle Sam sent you across the country (or globe).
Student Loan Interest Deduction
If you’re paying student loans, you can deduct up to $2,500 in interest annually. This deduction isn’t military-specific, but it’s available whether you itemize or not—making it accessible for service members taking the standard deduction.
Common Tax Mistakes to Avoid
Even with all these benefits, it’s easy to mess up. Here are the pitfalls to watch for:
Not claiming combat zone exclusion properly: Make sure your W-2 accurately reflects your combat pay in Box 12. If it doesn’t, contact your finance office immediately.
Claiming deductions twice: If the military reimbursed you for a PCS move, you can’t also deduct those expenses. Only unreimbursed costs count.
Forgetting about state taxes: Just because you don’t owe federal taxes on combat pay doesn’t mean your state follows the same rules. Some states do tax combat pay. Check your specific state’s rules.
Missing the MSRRA benefits: Military spouses often pay state taxes unnecessarily because they don’t realize they qualify for residency relief. Don’t leave money on the table.
Not keeping good records: Save your orders, receipts for unreimbursed expenses, and documentation of your duty locations and dates. The IRS might want proof years later.
Filing Jointly vs. Separately: Which is Better?
Most married couples benefit from filing jointly. You get access to higher standard deductions, better tax brackets, and more credits.
But there are situations where filing separately makes sense:
- One spouse has significant medical expenses or miscellaneous deductions
- One spouse has substantial debt issues or back taxes
- You’re legally separated and heading toward divorce
Run the numbers both ways before deciding. Tax software makes this easy—just input your information and see which filing status saves you more money.
Tax Planning Throughout the Year
Don’t wait until April to think about taxes. A little planning goes a long way.
Adjust your withholding: If you’re consistently getting huge refunds, you’re essentially giving the government an interest-free loan. Adjust your W-4 to keep more money in your paycheck throughout the year. That extra cash could go toward building an emergency fund instead.
Track deductible expenses: Keep a folder (physical or digital) for receipts related to uniforms, PCS moves, and travel for drill. Don’t scramble to find these in April.
Consider the combat pay election: When you’re in a combat zone, review whether including your tax-free pay in EITC calculations benefits you. This can be a significant money decision.
Plan for PCS moves: Understand which moving costs the military covers and which you’ll pay out-of-pocket. Anything you pay yourself might be deductible.
Looking Ahead: Tax Changes and Military Life
Tax laws change regularly. What’s true today might shift next year. The best strategy?
Stay informed. Check Military OneSource annually for updates. Review IRS Publication 3 each tax season. Take advantage of free tax preparation services that stay current with military-specific rules.
And remember—you earned these benefits through your service. Don’t leave money on the table because you didn’t know what you qualified for or thought the process was too complicated.
The Bottom Line
Military service comes with unique financial challenges, but it also comes with valuable tax benefits designed to ease that burden. From combat pay exclusions that could save you thousands, to automatic extensions when you’re deployed, to state tax relief for you and your spouse, these benefits add up to real money.
The key is knowing what’s available and actually claiming it. Use the free resources at your disposal—Military OneSource, VITA centers, and IRS publications. Keep good records throughout the year. And don’t be afraid to ask questions when something doesn’t make sense.
Your service protects our nation. These tax benefits help protect your wallet. Use them.
Need more strategies for managing your military finances? Visit Wealthopedia for expert guidance on everything from saving strategies to debt management tailored for military families.
This article provides general information about military tax benefits and should not be considered tax advice. Tax situations vary based on individual circumstances, state of residence, and current tax law. Consult with a qualified tax professional or use resources like Military OneSource for personalized guidance.
