Federal Tax on Military Retirement Pay

Most military retirement pay is treated (and taxed) as normal income, but in certain cases it can be excluded

In the eyes of the federal government military retired pay is no different from any other form of income, which means that you have to pay income tax on it.

Generally payment you receive as a member of the military is taxed as wages. But retirement pay is taxed like a pension. If your retirement pay is based on age or length of service it is taxable and must be included on your tax return on the section for pensions and annuities (this is line 16 on the actual Form 1040 [U.S. Individual Income Tax Return]).

In fact taxes should be withheld from your retired pay before you even get it. How much is withheld depends on how many exemptions you claim on your Form W-4 [Employee’s Withholding Allowance Certificate] after retirement. You can change how much tax is withheld by completing a new W-4. Claiming 0 exemptions means that the maximum amount of tax will be withheld; the more exemptions you claim the less will be withheld.

In January after the end of the tax year you should receive a Form 1099-R [Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.] showing how much retired pay you received and how much tax was withheld. You must report this information on your tax return.

The good news is that though subject to federal income tax, military retirement pay is not subject to FICA deductions – the payroll tax used to fund Social Security and Medicare.

Exceptions to the rule

If you receive a pension, annuity, or similar allowance for personal injury or sickness resulting from active serve in the armed forces of any country you may be able to exclude this from your income (and thus not pay tax on it).

In order for this pay to be tax-free, you must meet one of the following conditions:

• You were entitled to receive a disability payment before September 25, 1975
• You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975
• You receive the disability payments for a combat-related injury that resulted directly from armed conflict, took place while you were engaged in extra-hazardous service, took place under conditions simulating war including training exercises such as maneuvers, or was caused by an instrumentality of war
• You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it

If you meet one of these conditions then your retirement pay is tax-free. You will not receive a 1099-R and do not need to report this income on your return.

Also note that veterans’ benefits administered by the Department of Veterans Affairs (VA) are not taxable and do not have to be included in your income. This includes

• Education, training, and subsistence allowances
• Disability compensation and pension payments for disabilities paid either to veterans or their families
• Grants for homes designed for wheelchair living
• Grants for motor vehicles for veterans who lost their sight or use of their limbs
• Veterans’ insurance proceeds and dividends paid either to veterans or their beneficiaries. etc.

If you prefer to get your information direct from the horse’s mouth, you can refer to this page from the IRS. If you are ready to file your tax return you can do it right here on RapidTax.

Photo via The U.S. Army on Flickr.