By Hank Coleman
Posted in Articles
There are many types of military allowances and military pay that a service member can earn depending on where he or she is located and the type of job they perform in the military. Two of the biggest advantages that many Soldiers, Sailors, Airmen, and Marines often overlook are the taxable military pay and allowances.
And if you consider the tax advantages of certain military allowances that are not taxed, members of the military are provided with an added benefit to their total compensation.
The federal government classifies the accounting of military pay and allowances differently. The main portion of a Soldier’s paycheck that is taxed is his or her base pay. This is the flat rate that everyone earns based on their rank and the number of years that he or she has been in service.
Thanks to transparency, each member of the military can see what others earn. The difference is in the different kinds of military allowances. There are a few exceptions to the rule of course. For example, cost of living allowance in the United States is one military allowance that is taxed.
Most military allowances are not taxable incomes and are subsequently not reported to the IRS. Members of the military are not taxed every month on the money they take home for their Basic Allowance For Housing (BAH) and Basic Allowance For Subsistence (BAS). In addition to being exempt from state and federal taxes, these military allowances are not subject to Social Security tax either.
The Defense Finance And Accounting (DFAS) estimates that almost 30% of all military compensation is in the form of nontaxable allowances such as BAS and BAH. This can dramatically increase the amount of a military member’s take home pay.
While the military pay system can be hard to understand, these tax rules are for the benefit members of the military. The current military pay rates and military allowances tend to put more money into a service member’s pocket at the end of the month in take home pay that is not taxed.
For example, the average Basic Allowance For Housing (BAH) is typically about $1,200 which is paid tax free to service members. This alone can add $300 to a Soldier’s pay, assuming that he or she is in the 25% tax bracket. Basic Allowance For Subsistence (BAS) is $325 per month for enlisted members of the military. Servicemen also save $100 every month because this allowance is not taxed.
Understanding how the different military pay and military allowances are taxed can help you better understand your finances and how all of the systems interwork. With a better understanding of your income, you are put in a position to create a well thought out financial plan for you and your family by decreasing the amount you are taxed and increasing your pay.
Hank Coleman is a Captain in the U.S. Army, freelance writer, and the founder of several personal finance websites such as Military Money Might and Money Q&A. His writing has been featured on The Motley Fool, Military.com, and many others. You can follow him on Twitter at @HankColeman.