How to File Taxes With Military Re-enlistment Bonuses
Your military wages come from two different sources, pay and allowances. Allowances aren't taxable, because they're payment in kind to reimburse the military member for living expenses such as subsistence and quarters that are traditionally provided by the military service. Pay, however, as wages, is taxable. Re-enlistment bonuses are a form of pay, which means they are taxable, unless the member is deployed to a combat zone. The Defense Finance Accounting Service (DFAS) will provide you with an IRS form W-2 at the beginning of each year which will show your taxable income for the previous year.
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Instructions
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Block 1 of your W-2 has your taxable income last year. Taxable income should include all bonuses, including re-enlistment bonuses, which you received last year, with an important exception. All pay received in a month where you served in a combat zone for at least one day is not taxable and should not be included with the gross income in block 1. Block 1 should be correctly filled in provided your unit's pay office correctly reported your combat zone service exclusion to DFAS.
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Ensure you exclude all pay, including re-enlistment pay, which you were paid while you served in a combat zone from your income tax computations. In fact, even if you received your re-enlistment pay after you returned home, it's not taxable as long as you performed your re-enlistment in a combat zone, because the act of re-enlisting was what earned you the bonus, and it occurred in a combat zone.
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Ask your unit's pay office to request that DFAS correct your pay record if you notice that your W-2 includes your re-enlistment bonus in block 1 when you reenlisted in a combat zone. They should be able to ask DFAS to re-issue a corrected W-2 to submit with your tax return.
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Check with your home state to see if they exempt military pay from state taxes while you're serving outside the state. If they do, you don't owe taxes for your enlistment bonus to the state, either.
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Tips & Warnings
Since bonuses paid for re-enlistments in combat zones are tax-free, many military members have decided that re-enlisting in a combat zone is wise, since they can then reduce their tax bill by thousands of dollars.
