Yes, the federal government does tax military retirement pay. The IRS treats it as pension income, reported on lines 5a and 5b of Form 1040, and taxed at ordinary income rates.1Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income Several related payments a retiree may receive alongside that pension, however, are partially or fully exempt, and the differences matter at tax time.
Why Retired Pay Is Taxable Income
Federal law defines gross income to include all income from whatever source, and pensions are explicitly on the list.2Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined If your retired pay is based on age or length of service, all of it counts as taxable income, whether you retired under the legacy High-3 system or the Blended Retirement System that became the default for members entering service on or after January 1, 2018.
Retired pay does not trigger FICA. Social Security and Medicare payroll taxes apply to earned income like wages, and a pension is not earned income, so DFAS withholds no FICA from your monthly check.3The Official Army Benefits Website. Federal Taxes on Veterans’ Disability or Military Retirement Pensions
What Is Not Taxed
Disability compensation paid by the Department of Veterans Affairs is completely exempt from federal income tax. The exemption covers all VA-administered benefits, not just disability payments.4Office of the Law Revision Counsel. 38 U.S. Code 5301 – Nonassignability and Exempt Status of Benefits If your check comes directly from the VA, you do not report it as income.
Combat-Related Special Compensation (CRSC) is also tax-free. Federal tax law excludes from gross income any payment for injuries resulting from armed conflict, extrahazardous service, conditions simulating war, or an instrumentality of war.5Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness CRSC replaces retired pay offset by VA compensation with a combat-disability payment, and that replacement is not taxed.
Dependency and Indemnity Compensation (DIC), paid by the VA to surviving spouses, children, or parents of service members who died in the line of duty or from a service-connected condition, is also completely tax-free.6VA.gov. About VA DIC for Spouses, Dependents, and Parents
The One That Trips Retirees Up: CRDP
Concurrent Retirement and Disability Pay (CRDP) lets eligible retirees collect both full military retired pay and VA disability compensation without the usual offset. Eligibility generally requires at least 20 years of creditable service and a VA disability rating of 50 percent or higher.7Office of the Law Revision Counsel. 10 U.S. Code 1414 – Members Eligible for Retired Pay Who Are Also Eligible for Veterans’ Disability Compensation
CRDP is taxable. DFAS treats it as a restoration of retired pay rather than a separate benefit, so if your retired pay is taxable, your CRDP is taxable too. If your retired pay is non-taxable because it is based entirely on a disability, the CRDP follows suit.8Defense Finance and Accounting Service. Is it Taxable? Most retirees receiving CRDP retired based on years of service, so in practice their CRDP shows up on the 1099-R as part of taxable retired pay.
Retroactive VA Ratings and Refunds
If the VA increases your disability rating or grants a rating retroactively, you may have overpaid federal tax in earlier years, since you were taxed on retired pay that should have been offset by tax-free VA compensation. The IRS lets you recover that money by filing an amended return.9Internal Revenue Service. Veterans Tax Information and Services The same applies when CRSC is granted retroactively for years you were taxed on the corresponding retired pay.
The window is tight. You have three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later.10Internal Revenue Service. Topic No. 308, Amended Returns A retroactive rating covering several years can mean real money, but anything outside that window is lost. File promptly.
TSP Withdrawals
Once you start drawing from your Thrift Savings Plan, the federal tax treatment depends on which balance the money comes from.
- Traditional TSP: every dollar you withdraw is taxed as ordinary income, including your contributions, government matching contributions, and all earnings. You deferred taxes going in, so you pay them coming out.11Thrift Savings Plan. Changes to Tax Rules About TSP Payments
- Roth TSP, qualified distribution: if at least five years have passed since January 1 of the year of your first Roth contribution and you are at least 59½, permanently disabled, or deceased, both contributions and earnings come out tax-free.
- Roth TSP, nonqualified distribution: contributions come out tax-free, but earnings are taxed as ordinary income and may face a 10 percent early withdrawal penalty.
Tax-exempt combat zone pay contributed to your Roth TSP is never taxed and never penalized, regardless of whether the distribution is qualified.11Thrift Savings Plan. Changes to Tax Rules About TSP Payments
Survivor Benefit Plan Annuities
Survivor Benefit Plan (SBP) annuities paid to your beneficiaries are generally taxable to the recipient, and DFAS issues a 1099-R each year.12Soldier | Army.mil. SBP and Taxes Fact Sheet The SBP premiums deducted from retired pay while the member was alive are not included in taxable income for those years.1Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income A survivor receiving both SBP and DIC should remember that the SBP portion is taxable and the DIC portion is not, even though the two interact through an offset calculation.
Withholding, 1099-R, and Estimated Payments
DFAS withholds federal income tax from your retired pay each month, and the default may not match what you owe. The fastest way to adjust it is through your myPay account; you can also mail or fax a signed Form W-4 to the DFAS office in Indianapolis.13Defense Finance and Accounting Service. Changing Your Federal Income Tax Withholding (FITW) SBP annuitants use Form W-4P instead.14Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments If you claim retired pay is fully exempt from withholding, you must recertify that status every year with a new W-4, or DFAS will reset withholding to single with no adjustments.
When withholding falls short, because of investment income, rental income, or a working spouse, you may need to make quarterly estimated tax payments. The general rule: you owe estimated payments if you expect to owe $1,000 or more at filing time beyond what is withheld. One useful exception for retirees: if you retired after reaching age 62 and your underpayment was due to reasonable cause, the IRS may waive the penalty.15Internal Revenue Service. Estimated Taxes
DFAS issues Form 1099-R each January, showing gross distribution, taxable amount, and federal tax withheld for the prior year. The current year and the two prior years are available through myPay. If you do not have a myPay account, you can request a copy by calling 800-321-1080.16Defense Finance and Accounting Service. Getting Your 1099-R
A Note on State Tax
Federal tax is only half the picture. State treatment of military retirement pay varies: a majority of states now fully exempt it, either because they have no income tax or because they have enacted a specific exemption. A smaller group offer partial exemptions, often phased by age or capped at a dollar amount, and a handful still tax military retired pay like any other pension. Check your state’s current rules before assuming your retired pay is state-tax-free.