Now That’s Just Weird: A Civilian’s Guide to Figuring out Military Rewards and Allowances

Out of all the weird military traditions out there, one you probably don’t think about is preparing a military tax return. 

But service members still have to do their taxes, even if their average day at the office looks quite different from their civilian counterparts. 

Here’s everything you need to know about preparing a military tax return, including a breakdown of the various types of military pay and special tax exclusions. 

Types of Military Pay and Allowances

When preparing a military tax return, you need to understand the types of military pay and allowances, as each type has its own set of tax rules. 

For a further explanation of military pay and exclusions, check out this helpful article. 

Basic Pay

Military members receive certain advantages on their taxable income since there’s a slight difference between military paychecks and military pay. 

Military pay is a specific group of compensation. Certain parts of a service member’s paycheck aren’t taxed, but all military pay is taxable. 

The main component of any individual’s salary is basic pay, which varies based on three factors: 

1. The amount of time spent in service to date
2. Whether the service member is enlisted or an officer
3. The time spent in their current rank

In addition, active duty pay differs from Guard/Reserve pay, and serving full time offers different benefits and entitlements than reserves. Pay will vary annually based on cost-of-living increases and congressional approval. 

Allowances

Allowances are the next most important element of military pay. They provide additional compensation for certain needs like food and housing. 

For example, a service member will get provided housing on base or with an allowance for housing. There are some cases where a service member might get both, usually if they’re forced to live apart from their spouse or children, but it’s usually one or the other. 

The most common allowances are: 

• Basic Allowance for Subsistence
• Basic Allowance for Housing

Most allowances are untaxed, which is a built-in benefit of military service. 

Keep in mind, though, that service members who live on base housing are still getting paid the same as those who receive allowances for commercial housing, even though it doesn’t show up in their paycheck. 

So when you hear of an enlisted service member making a salary in the family of $18,000, keep in mind that they’re most likely receiving free housing. 

Special and Incentive Pay

In addition to basic pay and allowances, the military has special and incentive (S&I) pay. 

This is designed to address specific issues that cannot be addressed through basic pay increases. 

The key difference between basic pay and S&I pay is that basic pay is based on rank and years of service, while S&I increases compensation for certain critical skills and occupational specialties, which makes it an excellent tool to recruit highly trained individuals to the military. 

Click here for a complete index of current S&I pay categories. There are currently over 60 pays authorized into law. 

Combat Zones

An essential component of a military career is deployment. 

If a service member is deployed in an area currently designated as a combat zone by the Department of Defense, or if they are serving in direct support of operations in a combat zone, they will qualify to have income excluded from federal income tax during that time. 

Currently designated combat zones include areas like: 

• The Sinai Peninsula
• Afghanistan, including: 
  • Yemen
  • Somalia
  • Phillippines
  • Djibouti
  • Jordan
  • Kyrgyzstan
  • Pakistan
  • Tajikistan
• The Arabian Peninsula, including:
  • The Red Sea
  • The Persian Gulf
  • The Gulf of Oman
  • The Gulf of Aden
  • Jordan
  • Lebanon
• Kosovo area

The idea is to let deployed service members focus on the task at hand instead of worrying about money back home, as a sign of appreciation from the United States government. 

Combat Pay Tax Exclusion

Now, there are certain stipulations that come with the combat pay exclusion. 

Any base pay earned while in a hot zone is excluded from federal income tax. The amount of the exclusion is unlimited for enlisted service members. For officers, the exclusion is limited to the maximum amount of enlisted pay. 

However, it is still subject to Social Security and Medicare. States vary on whether they extend the federal combat pay exclusion to state income taxes, so it’s important to check the laws of your state when doing your taxes. 

In addition, the combat pay exclusion extends to other forms of pay beyond basic. For most service members, the biggest component of this is re-enlistment bonuses received while deployed. 

For officers, various forms of special pay are excluded from federal income tax during deployment in a combat zone. These include: 

• Special assignment pay
• Foreign language pay
• Hardship duty pay
• Flight and sea pay
• Medical or dental pay

These forms of pay depend on the officer’s career path and location of service. 

Tax Forgiveness if Killed in Action

In addition to tax exclusions while stationed in combat zones, the federal government offers certain benefits if a service member is killed in action. 

If a service member is killed in action while deployed in a combat zone, or if they later die from injuries sustained in a combat zone, their family can make a request with the IRS to forgive any outstanding tax debt. This can also extend to the family if the service member already paid their outstanding taxes.  

Weird News Beyond Your Military Tax Return

To put it simply, military taxes are a bit…well, weird. When you’re stationed in a combat zone and someone is shooting at you, the last thing you’re thinking about is your military tax return. 

But weirdness with taxes doesn’t end with the military. Check out these seven odd tax exclusions that are totally legit in the eyes of the IRS, or check out our blog for even more weird news. 

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