Introduction: Unique Tax Rules for Those Who Serve

Members of the armed services face a unique tax landscape. From combat-zone pay exclusions to special filing deadlines and state residency rules, military personnel — including active duty, reserves, and veterans — must understand how their service affects federal and state tax obligations. At Z Tax & Accounting, we help military clients and their families clearly navigate these issues to maximize benefits and stay compliant.

1. What Types of Military Income Are Taxable vs. Non-Taxable?

Understanding which portions of military pay are taxable is the first step in effective tax planning.

• Regular basic pay is generally taxable for federal income tax purposes.
  
  

• Certain allowances, such as the Basic Allowance for Housing (BAH) and the Basic Allowance for Subsistence (BAS), are typically non-taxable because they are intended to offset living and food expenses.
  
  

• Income earned while serving in a designated combat zone (e.g., hostile-fire or imminent-danger pay) may be excluded from federal income tax, if you meet the criteria.
  
  

• Some allowances or special pays (e.g., certain cost-of-living allowances in the continental U.S.) can be taxable despite being allowances.
  
  

2. Federal Tax Benefits Common to Military Members

Here are key tax-benefit opportunities available at the federal level for military personnel and their families:

• Automatic deadline extensions: If you serve in a combat zone or are stationed overseas in certain operations, you may qualify for automatic extensions to file and pay your taxes.
  
  

• Earned Income Tax Credit (EITC) special rules: Non-taxable combat pay can be treated as earned income for purposes of the EITC, potentially increasing your credit amount.
  
  

• Free tax-filing resources: The Department of Defense offers the “MilTax” program, which provides free tax return preparation and e-filing for service members and some veterans.
  
  

• Allowance exclusions: As noted, certain allowances such as BAH and BAS are excluded from income.
  
  

3. State Tax Considerations for Military Personnel

State tax implications can significantly impact the overall tax burden for a service member. Some important points:

• If your state of legal residence does not tax personal income at all, then you may owe no state income tax on your military pay. Examples include states like Texas, Florida, and Alaska.
  
  

• Some states offer partial or full exemptions for military retirement pay or for active-duty service outside the state.
  
  

• Residency and domicile rules matter: You must correctly establish your legal home state (driver’s license, voting registration, etc.) to claim exemptions.
  
  

4. Key Action Items for Military Clients

Here’s how Z Tax & Accounting can help you proactively manage your tax planning as a service member

a: Review your pay and allowances

1. • Determine which portions of your income are taxable and which are excluded (e.g., BAH, BAS, combat pay).
     
     

b: Optimize beneficial credits

1. • Use special EITC rules, make sure non-taxable combat pay is properly handled.
     
     

c: Confirm state tax residency status

1. • Establish and document your domicile state to take advantage of state tax breaks.
     
     

d: Leverage free resources & filing extensions

1. • Use MilTax or other military tax programs; understand automatic filing deadlines if deployed.
     
     

5: Plan for transition/retirement

1. • If you are transitioning out of service or receiving military retirement pay, clarify how retirement income is taxed federally and by your state.
     
     

6: Stay current on tax changes

1. • Rules around military pay, allowances, and state taxation change frequently—executive orders, new regulations, or legislation may affect your planning.
     
     

Why Z Tax & Accounting Is the Right Choice for Military Tax Clients:

At Z Tax & Accounting, we understand the tax challenges unique to service members and their families. We:

• Stay current on IRS rules and military-specific tax provisions.
  
  

• Guide you through federal and state tax implications of military service.
  
  

• Help you separate what’s taxable from what’s exempt.
  
  

• Assist with domicile/residency planning for state tax benefits.
  
  

• Provide clarity in transition and retirement planning post-service.

Conclusion: Serving Those Who Serve

Serving in the military comes with unique tax rules — and significant opportunities. Understanding which income is taxable, which benefits can be excluded, and how state tax rules apply is vital. With the right guidance, you can minimize your tax burden and avoid costly mistakes. At Z Tax & Accounting, we stand ready to support service members, veterans, and their families in achieving sound tax outcomes and long-term financial well-being.

Ready to get started? Contact us today to schedule your military-tax review.

Armed Forces Tax Guide          The Military Spouses Residency Relief Act