Understanding Military Tax Benefits: Tips and Tax Breaks for Servicemembers

Deductions, exemptions, and strategies tailored to military life

Filing your taxes can feel daunting, but for active-duty service members, veterans, and military spouses, ensuring that you're taking full advantage of all of the deductions, exemptions and exclusions available to you can result in substantial savings on your 2025 tax return. Here are some helpful tax tips as you prepare for the upcoming season.

Get started on your 2025 tax return early

The 2025 tax deadline is Tuesday, April 15. With changing tax rules and all the various military tax exemptions and deductions to consider and document, you need to give yourself enough time to prepare your military tax return. 

Consider your state of residence

Only a service member’s state of legal residence may tax their military pay. A Frequently asked question by service members, compared with their civilian peers, may be “what is my resident state for tax purposes?”

Military members cannot simply name any state as their legal residence for the purpose of reducing the taxes they will owe. But if you have been stationed in a different state and take steps to show that you intend to make that state your future home, there is an opportunity to change your state of residence to one that offers military tax benefits in the form of:

• Tax-free income options while on active duty
• Exemptions on military retirement pay
• Property tax exemptions

Steps to take might include registering to vote, obtaining a local driver’s license, or registering your vehicles in the new state. To officially change your state of residence, you will need to fill out a form DD-2058 and submit your change through your pay office for processing. If you anticipate that making this change will significantly change the amount of taxes you will owe, make sure to adjust your withholding in myPay. And at the end of the tax year, part-year resident state tax returns should be filed in each state which requires a tax return. One additional step to consider is sending a letter to your former state's taxing authority announcing your intention to establish a new legal residence.

A state’s tax laws should never be the sole reason for military families to change their residency, so if you’re considering a change, be sure to consider all the implications. This comprehensive list of veterans’ benefits by state might be a good place to start.

Get to know your available military tax deductions, exemptions and exclusions

Members of the military are eligible to deduct, exempt or exclude certain types of income and expenses from federal income tax. It’s important to be aware of these opportunities, understand the rules associated with them and, in some cases, keep accurate records to ensure you can take full advantage of them.

Combat pay

One of the most notable military tax benefits is the exclusion of combat pay from taxable income. The combat pay exclusion ensures that the additional income earned in designated combat zones is not subject to federal income tax. This exclusion applies to all ranks and branches of the military.

To maximize this benefit, service members should ensure that their tax preparer is aware of their deployment status and combat zone service. Keeping accurate records of deployment periods and locations is crucial for claiming this exclusion.

Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS)

The BAH and BAS are additional forms of compensation for service members. BAH covers housing-related expenses, while BAS provides funds for food. The good news is that both BAH and BAS are tax-free, offering service members a valuable financial advantage.

Military Retirement Pay and Military Disability Compensation

Military retirement pay is taxed as a pension at the federal level unless the circumstances of your retirement are due to combat related injuries--though tax exempt status is not guaranteed. Your retirement pay may, however, be exempt from state income taxes depending on your state of residence. Disability pay, on the other hand, is fully tax-exempt for veterans who receive it due to service-connected injuries or conditions. This tax exemption helps veterans maintain financial stability as they transition to civilian life while recognizing their sacrifices for the country.

Capital Gains Taxes on the sale of a home

When a homeowner sells their primary residence for more than they paid for it, the profit is subject to capital gains taxes. But if the owner has occupied the home for at least two of the previous five years, they are allowed to exclude up to $250,000 for a single filer and up to $500,000 for a married couple from federal taxation. Military members who get Permanent Change of Station (PCS) Orders that relocate the homeowner more than 50 miles away can extend that five-year window up to 10 additional years.

Moving expenses

Frequent relocations are a reality for many military families. Fortunately, the IRS allows service members to deduct certain moving expenses associated with a PCS move. Deductible expenses include the cost of packing, shipping, and storing household goods, as well as travel and lodging expenses, which are paid out of pocket.

To make the most of this deduction, keep detailed records of moving expenses, including receipts and mileage logs. Additionally, be aware of any changes in tax laws that may affect the deductibility of certain expenses.

Earned Income Tax Credit (EITC)

EITC is a refundable tax credit designed to assist low to moderate-income individuals and families. Military families often qualify for the EITC, particularly if they have children. To qualify, earned and investment income must fall below a specified threshold.

Service members should explore their eligibility for the EITC and ensure they claim the credit if they meet the criteria. It's essential to stay informed about any changes to the EITC rules and income limits.

Death proceeds

The death of a military family member is not a time when anyone wants to think about taxes, but it’s important to be aware that death gratuities and insurance proceeds are not subject to taxation. Consult your tax professional to ensure there are no other taxable events caused by your military family member’s death.

Deployment extensions

The official tax filing date in 2025 falls on Tuesday, April 15. However, some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes. 

Take advantage of The Military Spouse Residency Relief Act

Relocating for the military often comes with its own set of challenges. Location affects not only service members, but their spouses as well. Each time a service member moves, they can maintain their state of residency. However, in the past, their spouses didn’t have the same luxury. The Military Spouses Residency Relief Act (MSRRA) of 2009 extended the ability to declare a single state of residency to military spouses. The following conditions must be met to qualify under the MSRRA:

• The service member must be living on military orders in a state that is not their resident state
• The spouse is in that state solely to live with the service member
• The service member and spouse have the same resident state

When all these conditions are met, the spouse is only required to pay taxes on income in their state of legal residency.

2025 Law Changes: Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) was a major tax code overhaul introduced in 2017. Many of its reforms are set to expire in 2025. Your tax implications may change with the expiration of these laws. It may be wise to consult your financial advisor or tax professional to be prepared for any changes that may occur.

Available services for military members

IRS Volunteer Income Tax Assistance (VITA)

Service members, veterans and their families have access to free tax preparation services through IRS Volunteer Income Tax Assistance (VITA) offices on military bases. The location, hours, and duration of this all-volunteer help program will vary depending on the military installation, but you can learn more through your base’s Family Service Center, Fleet and Family Support Program, Legal Assistance Center, or First Sergeant’s office.

Department of Defense MilTax

The Department of Defense offers MilTax as a free tax resource for the military community. MilTax is a suite of tax services available for members of the military, as well as qualifying veterans and family members. There are no income limits. MilTax includes tax preparation and electronic filing software, personalized support from tax consultants and current information about filing taxes.

It's designed to address the realities of military life – including deployments, combat and training pay, housing and rentals and multistate filings. Eligible taxpayers can use MilTax to electronically file a federal tax return and up to three state returns for free.

First Command does not provide legal or tax advice, and this article does not contain any legal or tax advice. Should you require legal or tax advice specific to your situation, you should consult with an attorney or qualified tax advisor. The information provided to you herein is provided for informational purposes only, is not intended to be tax or legal advice, and should not be used for the purpose of avoiding tax-related penalties under the Internal Revenue Code.