Tax Treatment of Military Retirement Pay

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Requirements

The following retirement benefit sources are taxable and must be reported as income:

Non-disability retirement pay, unless received from the VA Retainer pay for transfers to Reserve units Payments for accrued leave Any private sector income, including capital gains and interest income

Non-Disability Retirement

You must pay taxes on regular military retirement income. As with private sector retirement, the amount withheld is based on your total income and any exemptions that you have claimed. If your benefits have been reduced in accordance with the RSFPP (Retired Serviceman’s Family Protection Plan) or under the Dual Compensation Act, you may be eligible for exemption of your non-disability benefits.

Disability Retirement

Disability retirement income that is based on a claim filed as a direct result of combat exposure may be exempt from federal taxes, depending on the type of compensation you have elected to receive. If your benefits are calculated based on a disability percentage multiplied by your base pay rate, then all of your disability income is exempt. However, if you’ve chosen to receive payment based upon your length of service, then you must pay taxes on all income above the level that you would have received if you had chosen the previously mentioned method.

According to Military.com, disability or pension payments from the VA are tax exempt. If you are not receiving benefits from the VA, but are entitled to, then the amount that you are eligible to receive is deductible from your normal retirement pay.

Social Security

Retirement benefits are exempt from social security tax requirements, but no credit to social security is contributed from retirement income either.

Social security benefits are taxable just as they would be with private sector retirement. The amount that you must report as income depends on your total income level. Follow the link at the end of this article for more information on social security taxes.

Deductions and Exclusions

As with most tax codes, there are deductions and exclusions that can be claimed to offset your total tax liability. Examples of possible deductions from gross income include moving expenses incurred directly after retirement and alimony payments to a former spouse. Examples of excluded income include insurance dividends, certain annuity payments, and state veteran bonuses.

Follow the link at the end of this article for a more in-depth list of deductions and exclusions. The best policy is to consult a tax specialist when filing your returns. A tax attorney specializing in military retirement benefits will help you to minimize your total tax liability and maximize your total retirement income.

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