I’ve noticed a lot of confusion and frustration about taxes on military bonuses. That’s not surprising, because it IS confusing, but it doesn’t have to be too hard to understand.
First, you have to have a firm grasp on how income taxes work. If you are not sure, then read How Income Taxes Work, and ask questions. Feeling good about regular taxes? Great.
Here’s the magic thing about taxes on military bonuses: adding a bonus just changes the numbers. Everything else is the same. Your income number goes up, and your withholding number goes up because you’ve had taxes withheld on the bonus.
Here’s an example of a servicemember who gets a $10,000 bonus that has $2,500 in taxes withheld from the payment. Everything else remains the same, except his income is higher, increasing his taxes, and his withheld amount is higher.
In this sample, the taxpayer had $2,500 withheld from the bonus payment, but had an additional $1,277 in their tax refund, so they really only paid $1,223 in taxes on that $10,000 payment. Obviously, every single tax situation will be different, but this gives you a rough idea how it works.
The IRS requires that the Defense Finance and Accounting Service (DFAS) withhold 22% of all bonus payments, effective 2018. Prior to 2018, it was 25%. Just like all other tax withholding, the taxes taken out could be too much or too little. Thankfully, they’re usually too much, and they get returned to you as part of the overpayment/refund when you file your tax return. If the taxes taken out of the bonus are too little, you may owe additional tax when you file your tax return.
There are a couple of things to think about:
Bonuses in a Combat Zone
If you are able to receive your bonus while you are located in a Combat Zone Tax Exempt area, then you won’t owe federal income taxes on that money. Schwing!
Bonuses Saved for Retirement
Bonuses can be put into retirement savings accounts such as the Thrift Savings Plan (TSP) or an Individual Retirement Arrangement (IRA). If you put it into a Roth account, it won’t give you any tax benefit now, but it will grow tax-free and distributions later will be tax free. If you use a traditional account, you won’t be taxed on that money now but future distributions will be taxable.
You Can Save More If You’re In A Combat Zone
If you are in a Combat Zone Tax Exempt area, you can contribute above the usual limit. Instead of $18,000 for the year, you can contribute up to $53,000 (2016). There are some tricky rules about contributions, because amounts that exceed the $18,000 limit must be made into traditional accounts. Get some help if you’re a super-saver who is going to exceed the $18,000 limit with tax-exempt funds.
If you have questions about other aspects of military enlistment and re-enlistment bonuses, see Ryan’s great post at The Military Wallet: Enlistment and Reenlistment Bonus Guide – Everything You Need to Know about Bonuses.
Still confused about taxes on military bonuses? Ask questions in the comments. I’ll answer them for you, plus update this post to make it more clear.
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Jonathon Friel says
13 February 2017 at 1:48 pmwhen you reenlist in a combat zone, only the installment you receive while in country is tax free, not the entire bonus. I just got off the phone with DFAS and was informed of this.
Romeopapa says
25 April 2017 at 3:17 pmWhen I reenlisted while deployed the entire amount was tax free (the half that I received up front while in the combat zone and the later installments, even though I was not deployed when I received them).
Terell says
3 March 2017 at 4:39 pmI’m considering the LRP option when enlist in the military. Currently, I have 63,000 in stundent loan debt. With the active duty army paying 33.3% of my balance every year, how much taxes will be taken out of my payments?
I’m assuming that it would be in the 25% tax bracket with about 3000 in taxes taken out for payment.
Eric B says
6 September 2017 at 9:03 amI understand that military pay in a combat zone is tax free only up to ~$8,200 per month with pay above that amount subject to tax. Does this also apply to bonuses received during combat deployment? For example: base pay is $6,200 per month, I also receive a $25,000 health professional bonus for commuting to extra time. Will the bonus be tax free?
Michael says
13 November 2018 at 9:03 pmI see you posted this in 2017. What was the outcome? Was your bonus tax while deployed?
Cody Morris says
1 May 2019 at 6:11 amWhen I reenlisted in 2012 in Afghanistan I received 35,000 tax free all at once.
Seth Aniagyei says
1 October 2017 at 2:11 pmI enlisted in Oregon but PCS’ed to Ft Hood Texas. I had a $10.000 bonus. I only received $6,600. I understand the IRS takes 25% as tax. Does the State also take a cut as taxes. My State tax from that pay period rose to $986 from the usual $111 to $986. Is there State tax on bonuses and if so, what percentage does the state take out as Tax ?
Kate Horrell says
2 October 2017 at 1:19 pmThe IRS requires tax withholding at 25% – it isn’t an actual tax bill but a pre-payment on the estimated total yearly tax. Many states also require withholding on bonuses. The amount would depend on the state.
James says
27 February 2018 at 10:53 amI received two bonuses last year and both were taxed. I was told by my career counselor that I will be able to get what was taxed, back during tax return season. Is that true? Some are saying I won’t see the money that was taxed.
Kate Horrell says
27 February 2018 at 7:02 pmEveryone’s tax situation is different. Most military service members see most of the withheld taxes refunded at tax time, but that’s not true for 100% of cases. It depends on your overall income, family size, credits you may be able to claim, and most importantly, your total withholding for the year (regular withholding plus bonus withholding.) I’d be glad to help you go over your tax return and explain your specific situation to you.
Jdon says
8 April 2018 at 4:36 amIf I am stationed in gorgia and relieved a bonus did I pay gorgia state tax and NY State tax if my home of record I’d ny
Kate Horrell says
8 April 2018 at 10:25 amJdon, you had taxes withheld for your state of legal residence as listed on your LES. Whether you actually “paid” any taxes depends on a wide variety of factors including your state tax law and particular situation.
KC says
18 May 2018 at 4:14 pmAre sign on bonuses garnishable by the government and if so how much can they take?
Curious Soldier says
6 July 2018 at 12:07 pmDo you pay payroll taxes on military bonuses? I.e. 6.2% social security + 1.45% medicare = 7.65% ?
Thanks!
Kate Horrell says
6 July 2018 at 12:41 pmYes, bonuses are regular earned income and are subject to payroll taxes, as well as state and federal income taxes.
Brian says
7 July 2018 at 3:14 amJust a point out, they should only be withholding 22% in 2018, not 25% like 2017 and prior. https://www.irs.gov/publications/p15#en_US_2018_publink1000202352
Kate Horrell says
7 July 2018 at 10:56 amThanks for the link, Brian!
George says
29 July 2018 at 11:32 pm“Bonuses can be put into retirement savings accounts such as the Thrift Savings Plan (TSP) or an Individual Retirement Arrangement (IRA). If you put it into a Roth account, it won’t give you any tax benefit now,”
Putting a percentage of my bonus into TSP would not lower my taxable income? I understand the bonus will be taxed a percentage no matter what, but wouldn’t it lower the overall taxable income?
Lynda says
12 November 2018 at 10:36 amMy husband got a military bonus and we were taxed on it, now that he is retiring they are making us pay it back and withdrawing from he’s retirement taxed again, can they do that? So we basically paid taxes twice on this amount.
Kate Horrell says
12 November 2018 at 1:38 pmLynda, there is a way to reclaim this on your taxes, but it is complicated. You’re going to want professional help with this. https://www.military.com/paycheck-chronicles/2014/11/05/bonus-repayment-gets-messy
Tony says
26 April 2019 at 9:31 amCurrently deployed to Qatar, a tax free zone, I’m receiving the first half of my 20,000$ bonus while I was here. Is this going to be tax-free since I am in a tax-free zone?