Which Military Retirement Pay Is Taxable
If your retirement pay is based on your age or years of service, it’s taxable as a pension. You report it on lines 5a and 5b of Form 1040 or 1040-SR. Several related payments stay out of your income, though.
If you receive VA disability compensation, your retirement pay is generally reduced by that amount, known as the VA waiver. The VA compensation is tax-free, and only the retirement pay you still receive after the waiver is taxable.
| Payment type | Taxable? |
|---|---|
| Retirement pay based on age or length of service | Yes |
| VA disability compensation and other VA benefits | No |
| Combat-related special compensation (CRSC) | No |
| Retirement pay reduction that funds a Survivor Benefit Plan (SBP) annuity | No |
| Disability retirement pay for a combat-related injury | May be excluded |
| Disability retirement pay you were entitled to before Sept. 25, 1975, or received as a member on Sept. 24, 1975 | May be excluded |
The SBP pays an annuity to your survivors after you die. When your retirement pay is reduced to cover it, you leave the reduction out of your income. Annuity payments to your survivor are generally taxable to them.
CRSC is also excluded, but other parts of your retirement pay may still be taxable. CRDP, which restores retired pay that was reduced by the VA waiver, is taxable like your regular retirement pay. Retirement pay doesn’t qualify for the combat zone exclusion, even if you served in a combat zone.
How Military Retirement Pay Is Reported and Withheld
Once you know which pay is taxable, the next step is tracking what you received and what was already paid in tax.
Your Form 1099-R
Each year, you get a Form 1099-R for your retirement pay. It shows your taxable retirement pay and any tax withheld.
Withholding With Form W-4P
Withholding is income tax taken out of each payment and sent to the IRS for you. Military retirement pay isn’t subject to Social Security or Medicare payroll (FICA) taxes. You set how much federal tax is withheld from your retirement pay using Form W-4P.
You can choose no withholding, but your pay is still taxable. If too little is withheld during the year, you’ll owe the difference at tax time and may owe an underpayment penalty. To avoid this, adjust your Form W-4P withholding or make quarterly estimated tax payments using Form 1040-ES.
Claiming a Refund After a Retroactive VA Rating
If you retired based on years of service and the VA awards you disability benefits retroactively, you can exclude retirement pay for that period, up to the amount of your VA benefits. To get back tax you already paid on it, submit Form 1040-X for each affected year. Form 1040-X is the amended return you use to correct a past return, and you attach your VA determination letter which must show the amount withheld and the effective date.
You normally have 3 years to claim a refund. After a retroactive VA determination, that deadline is extended 1 year from the date of the determination. The extension doesn’t apply to tax years that began more than 5 years before the determination date.
This rule applies to retirement pay. Lump-sum separation payments, such as severance, follow different rules, so check Publication 525 if you received one.
State Taxes on Military Retirement Pay
State treatment of military retirement pay varies. Some states have no income tax, and many others exempt military retirement pay fully or partially. Check your state tax agency’s rules to see what applies to you.
