Military Taxes: The Money Most Service Members Leave on the Table

Taxes are the one bill the military doesn't explain at formation. You get an LES, a W-2 in January, and a website that wants your credit card. Most of us figure it out alone, and most of us leave money behind.

After my deployment I filed with TurboTax like a lot of people do. What I didn't know: if you travel more than 100 miles to drill, you can deduct that travel. I'll get to that one, because if you're Guard or Reserve, it might be money you're owed too.

Here's what's worth knowing, in plain words.

1. Combat pay is tax-free, and one day counts for the whole month

If you serve in a designated combat zone, your pay for that month is excluded from federal income tax. Enlisted members and warrant officers can exclude all of their military pay for each month. Commissioned officers can exclude up to the highest enlisted pay rate, plus imminent danger or hostile fire pay.

The detail most people miss: one day in the zone counts as the full month. Land on the 31st and that whole month's pay is tax-free.

It also covers more than base pay: imminent danger and hostile fire pay, a reenlistment bonus if you signed it in the zone, and leave you earned there and sold. If you're hospitalized for a wound, illness, or injury from combat zone service, that pay can be excluded too, for up to two years after your last month in the zone.

Two things it doesn't do. You still pay Social Security and Medicare on that pay. And your pay office has to get it right on your W-2.

2. Check your W-2 for code Q

Tax-free combat pay shows up in box 12 of your W-2 with code Q. If you were in a combat zone and your W-2 shows your full pay as taxable with no code Q, don't just file it. Contact your pay office and ask for a corrected W-2.

3. Put that tax-free pay to work

This is where combat pay gets powerful.

• Roth TSP: contributions from combat pay are never taxed, and the qualified earnings come out tax-free too. Tax-free going in, tax-free coming out.
• Traditional TSP: contributions from combat pay go into a separate tax-exempt balance. When you take it out, you only pay tax on the earnings.
• Roth IRA: combat pay counts as earned income for an IRA, even though it isn't taxed. You can put tax-free money into an account that grows tax-free.

That last one is the move I wish I'd made. I wrote about it in What Was Worth the Money While I Served, and What Wasn't. If you're deploying, set it up before you go.

One more: if you get the Earned Income Tax Credit, you can choose to count your nontaxable combat pay as earned income if that gets you a bigger credit. Run it both ways.

4. You get more time to file

Deployed to a combat zone? Your deadline to file and pay moves to 180 days after you leave the zone, plus however many days you had left when you went in. Stationed outside the U.S. on tax day? You get an automatic two extra months to file and pay, without filing for an extension.

5. Your state of legal residence matters

On active duty, the Servicemembers Civil Relief Act protects your state tax residency for your military pay. In most cases you keep filing in your legal home state, not the state where you're stationed. Military spouses can choose to use either their own legal residence or yours.

Two catches. Income that isn't military pay, like a rental house or a spouse's job, can still be taxed by the state where it's earned. And states treat military pay differently, so check your home state's revenue department before you assume you owe nothing, or that you owe the full amount.

6. File for free with MilTax

MilTax is free tax software from the Defense Department, built for military returns. It was made for things civilians rarely deal with, like combat pay and more than one move in a year, and it files your federal return plus up to five state returns at no cost. You also get free help from tax consultants by phone or chat.

Who can use it: active duty, National Guard and Reserve whether or not you're activated, eligible family members, survivors, and veterans within a year of separation or retirement. You sign in through Military OneSource, and your eligibility is checked through DEERS.

I used TurboTax. MilTax is the option I'd look at first now, since it's free and built for the stuff that trips up military returns. You can also get free help at an IRS VITA site, and many installations have one.

If you're Guard or Reserve

Drill pay is taxed. It's basic pay, so it's taxable income like a civilian paycheck, unless you earned it in a combat zone. Your allowances, like BAH and BAS when you get them, are not taxed.

The deduction I didn't know about. If you travel more than 100 miles from home for drill or other reserve service, you can deduct the travel costs you weren't paid back for, from the time you leave home until you get back: mileage, lodging, and half of your meals, up to the federal per diem rate. You fill out Form 2106 and put the total on Schedule 1. It's an adjustment to income, so you get it even if you take the standard deduction. Active duty can't take it. Reservists can.

If your drill location is a long haul, run the numbers. A year of drill weekends plus annual training travel adds up.

Your tax checklist

Screenshot this before you file:

1. Deployed this year? Check box 12 of your W-2 for code Q. Missing? Ask your pay office for a corrected W-2.
2. Using combat pay well? Roth TSP, a Roth IRA, or both.
3. State: confirm your legal residence on file, and check your state's rules for military pay.
4. Guard or Reserve, drilling more than 100 miles from home? Track your unreimbursed travel costs all year.
5. File free: MilTax or a VITA site before you pay for software.

Taxes aren't the fun part of money. But the military gave you real tax breaks, and the only way to lose them is to not know they exist. Deploying soon? Start with Before You Deploy: The Money Checklist I Wish I'd Had.

Sources and further reading: IRS, Tax Exclusion for Combat Service; IRS Publication 3 (2025), Armed Forces' Tax Guide; TSP, Traditional and Roth Contributions; Military OneSource, About MilTax; Military OneSource, Taxes in the Military; Military OneSource, Tax Terms Defined for the Military; MyArmyBenefits, Combat Zone Tax Exclusion (CZTE); checked October 2026.

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Disclaimer: I am not a financial advisor. The information provided here is for educational purposes only and should be verified independently. See the full Disclaimer.