Military Taxes

Service members keep their state of legal residence when they move under orders. That means you can be stationed in one state and remain a taxpayer of another — and several states have no income tax or fully exempt military pay.

Your legal residence is established by intent and evidence: voter registration, driver's license, vehicle registration, and where you file. Mixing those signals across states is how families end up defending a residency claim to two revenue departments at once.

Military spouses can generally claim the same state of legal residence as the service member for tax purposes, even without ever having lived there. This is one of the most valuable and most overlooked provisions in military tax law.

It affects income tax withholding, vehicle registration, and voting. If your spouse's employer is withholding for the duty station state by default, that is worth fixing.

• Base pay is taxable.
• BAH and BAS are not taxable income — which is also why lenders can gross them up when qualifying you for a mortgage.
• Combat zone pay is excluded from taxable income for enlisted members, with a cap for officers.
• Reenlistment bonuses are taxable, but a bonus received in a combat zone may be excluded.
• Dislocation allowance and per diem are generally not taxable income.

The moving expense deduction was eliminated for most taxpayers, but active-duty service members moving under permanent change of station orders kept it. Unreimbursed costs for moving household goods and traveling to the new duty station remain deductible.

You cannot deduct what the government already reimbursed. Track reimbursements and out-of-pocket costs separately, from the start, because reconstructing it later is miserable.

Capital gains exclusion rules on a primary residence normally require living in the home two of the last five years. Service members on qualified extended duty can suspend that five-year clock, which matters enormously if you PCS and rent out a house for several years before selling.

Rental income from a former primary residence also brings depreciation, state filing obligations, and eventually depreciation recapture. Talk to someone before you turn a house into a rental by default.