Do Soldiers Have to Pay Taxes on Military Pay?

Yes, soldiers do pay taxes on military pay, but only on part of it. Basic pay is taxed as ordinary income like any civilian wage, while a large portion of what a service member actually receives, including housing and food allowances, combat zone pay, and VA disability compensation, is excluded from federal income tax entirely. The result is that a soldier whose Leave and Earnings Statement shows $60,000 in annual compensation might have federal taxable income closer to $40,000.

What Parts of Military Pay Are Taxed

Basic pay is fully taxable. Federal income tax is withheld from each paycheck, and Social Security (6.2%) and Medicare (1.45%) come out through FICA withholding, the same as any civilian job.¹

Special pays and bonuses are generally taxable too. Enlistment and reenlistment bonuses, flight pay, sea pay, and similar additions to basic pay are reported as income unless they’re earned during a month of combat zone service. Most allowances, by contrast, are not taxed at all.

Allowances That Aren’t Taxed

Federal law excludes “qualified military benefits” from gross income.² For most service members the two biggest are the Basic Allowance for Housing and the Basic Allowance for Subsistence. Both are excluded from federal income tax, state income tax, and Social Security and Medicare taxes. The IRS and Treasury have specifically confirmed that BAH, including supplemental BAH, is not taxable.³

Clothing and uniform allowances are also excluded under the same provision.² If you spend more on required uniforms than your allowance covers, you may be able to deduct the excess, but only for uniforms you’re prohibited from wearing off duty.

When you receive a Permanent Change of Station order, government-provided moving and storage services are not included in your income, and dislocation allowances, temporary lodging expenses, and move-in housing allowances are also excluded.⁴ Active-duty members are one of the few groups who can still deduct unreimbursed moving costs on Form 3903, and the deduction is available whether or not you itemize.⁵ If your reimbursement exceeds what you actually spent, the excess should appear as taxable wages on your W-2.

Combat Zone Pay

Pay earned while serving in a designated combat zone is exempt from federal income tax under 26 U.S.C. § 112. The exclusion applies for any month during any part of which you served in the zone. A single day of combat zone service makes that entire month’s qualifying pay tax-free.⁶

How much of your pay is excluded depends on rank. Enlisted members and warrant officers have all their compensation for the month excluded; commissioned warrant officers are treated as enlisted for this purpose.⁷ Commissioned officers are capped at the highest enlisted pay rate for the month plus any hostile fire or imminent danger pay.⁶ The exclusion also extends to members hospitalized for wounds, disease, or injury incurred in a combat zone, for up to two years after combatant activities in the zone end.

As of 2026, the IRS recognizes the Arabian Peninsula area (Iraq, Kuwait, Saudi Arabia, and surrounding waters), the Afghanistan area (including direct support countries such as Jordan, Djibouti, and Somalia), the Kosovo area, and the Sinai Peninsula.⁸ You don’t always have to be inside the zone to qualify. Service members performing duty in direct support of operations in a designated zone who receive hostile fire or imminent danger pay can also qualify.⁷

One quirk worth knowing: excluding combat pay from income can sometimes shrink your Earned Income Tax Credit. The IRS lets you elect to include nontaxable combat pay as earned income for the EITC calculation while keeping it out of taxable income.⁹

Your legal residence stays where it was when you entered the military unless you take deliberate steps to change it. That usually means establishing genuine ties to the new state: registering to vote, getting a driver’s license, and filing a DD Form 2058 with your finance office. Roughly a dozen states have no income tax or fully exempt active-duty military pay, which is why domicile selection is one of the most common tax planning moves in the military community.

Military Spouses

Under the Military Spouses Residency Relief Act, as expanded by the Veterans Benefits and Transition Act of 2018, a spouse who moves to a new state solely to be with a service member on orders can keep their own state of legal residence for tax purposes. The 2018 law also lets the spouse elect the service member’s state of legal residence, even if the spouse has never lived there.¹¹ The spouse chooses one state for the entire tax year from three options: their own state of legal residence, the service member’s state of legal residence, or the state of the service member’s permanent duty station.

Retirement Pay and VA Disability

Military retirement pay is taxable as ordinary income at the federal level. Federal tax is withheld based on the W-4 you have on file with DFAS, and the total is reported on a 1099-R. If you participate in the Survivor Benefit Plan, the premiums reduce your taxable retired pay because they come out before taxes. SBP annuity payments to a surviving spouse or other beneficiary are taxable income to the recipient.

At the state level, a large majority of states now fully exempt military retirement pay, and several others offer partial exemptions.

VA disability compensation is completely tax-free at both the federal and state level. The exclusion covers standard disability compensation, Dependency and Indemnity Compensation paid to survivors, and Special Monthly Compensation for more severe disabilities.¹²

Retirees who collect both retirement pay and VA disability should know how the two interact. Concurrent Retirement and Disability Pay (CRDP) is treated as taxable retired pay because it restores retirement pay that was previously offset by VA disability; it appears on your 1099-R. Combat-Related Special Compensation (CRSC) is generally tax-free, like VA disability itself.

Where to Get Free Help

MilTax, offered through Military OneSource, provides free tax software built around military situations, including PCS deductions, combat pay exclusions, and multi-state filing, plus free access to a trained tax consultant. Eligibility covers active-duty members, their families, survivors, and veterans within 365 days of separation or retirement, and the software includes up to five state returns at no charge.¹³ On-base tax centers during filing season and IRS Volunteer Income Tax Assistance (VITA) sites are the other main free options.¹⁴

1
Military Compensation and Financial Readiness. Tax Exempt Allowances
2
Office of the Law Revision Counsel. 26 U.S. Code 134 – Certain Military Benefits
3
Internal Revenue Service. Treasury, IRS: Supplemental Basic Allowance for Housing Payments to Members of the Military Are Not Taxable
4
Internal Revenue Service. 2025 Instructions for Form 3903 – Moving Expenses
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Internal Revenue Service. Topic No. 455, Moving Expenses for Members of the Armed Forces and the Intelligence Community
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Office of the Law Revision Counsel. 26 USC 112 – Certain Combat Zone Compensation of Members of the Armed Forces
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eCFR. 26 CFR 1.112-1 – Combat Zone Compensation of Members of the Armed Forces
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Internal Revenue Service. Combat Zones Approved for Tax Benefits
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Internal Revenue Service. 50 USC 4001 – Residence for Tax Purposes
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MySECO. Military Spouse Residency Relief Act
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Veterans Benefits Administration. Compensation
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Military OneSource. MilTax: Free Tax Filing Software and Support
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Internal Revenue Service. Get Free Tax Prep Help