How to Calculate Taxes for a Military Salary
Military salaries consist of pay---such as base pay, bonus pay, proficiency pay and combat pay---and allowances, including housing and subsistence allowances. The rule for paying taxes is that pay is taxable, under most circumstances, while allowances, as payment for benefits that would otherwise be received in kind, aren't taxable. The Form W-2 you receive at the beginning of each year for income the previous year will sort out what is pay and what are allowances for you, as the Defense Finance Accounting Service (DFAS) prepares it in accordance with IRS regulations.
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Instructions
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How to Calculate Taxes for a Military Salary
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Use your W-2 to determine what DFAS calculated your taxable income to be for the year. It should be the sum of all the pay (not allowances) you received during the calendar year, except for those months in which you served at least one day in a combat zone as an enlisted person or warrant officer. Base pay earned in months in which you spent at least a day (or more, if you're an airman) in a combat zone should be excluded from gross income. For commissioned officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.
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Don't declare bonus pay earned in a combat zone. If you re-enlist in a combat zone, the money isn't taxable, even if it's ultimately paid after you leave the combat zone, because the act of re-enlistment caused the money to be earned in the combat zone.
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Check to ensure that pay from months in which you served in a combat zone actually has been excluded from your gross pay. If not, visit your unit's pay office to have them correct the record. Have DFAS send you an updated W-2 based on the record correction.
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If you're hospitalized as a result of injuries received in a combat zone, your gross pay is exempt for up to two years while you're in the hospital, just as if the pay were received in a combat zone. Don't declare your gross pay for those months, either.
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Don't declare your allowances as pay. They aren't taxable and shouldn't be found in the taxable pay section of your W-2.
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Tips & Warnings
Many states exempt military members from paying taxes when they are stationed outside the state. Check with your state tax bureau to see if your home of record is in one of those states.
