When you joined the military as a young person and headed for basic training, retirement income might have been a small consideration. But if you’ve reached the age when retirement pensions and tax obligations play a role in your long-term planning, the Internal Revenue Service’s treatment of your military pension is of more immediate concern.
Taxing Military Pensions
If you receive a Department of Defense pension that’s based on your rank, time in service and final pay, the IRS treats this as new income and requires you to report it as income. Because these pensions weren’t funded by withholding from your paycheck, they’re subject to income tax as other earnings are. Report the amount of your military pension on lines 16a and 16b of your Form 1040 or 12a and 12b of your Form 1040A.
If your retirement includes benefits for disabilities suffered in the line of service, any disability penalty you were entitled to receive before Sept. 25, 1975, is not taxable. Disability benefits you receive from injuries suffered from combat, from training for combat or through an act of war, such as a terrorist attack, since Sept. 25, 1975, are also not taxable. If you receive a qualifying military disability pension, do not report it as income. Instead, only report the portion of your pension that you receive for time in service.
Income Tax Withholding
The Department of Defense will withhold estimated income taxes on your retirement pension if you submit a Form W-4 to notify it of your withholding situation. In this case, taxes on your pension are withheld as you receive it just like income from employment is. While this may not eliminate your year-end tax bill if you have other sources of income, withholding protects you against penalties for late payment and interest that may accrue if you don’t contribute taxes in a pay-as-you-go fashion.
Social Security and Military Retirement
Receiving an armed forces pension doesn’t exclude you from receiving a Social Security retirement pension as well. While Social Security retirement benefits on their own aren’t usually taxable, you may be taxed on a portion of your benefit if your military pension and other sources of income are large enough. If half of your Social Security benefit plus all of your other income, including your military pension, exceeds $25,000 for individuals and $32,000 for couples, 50 to 85 percent of your Social Security income is subject to tax. The taxable portion varies by the amount of your other earnings.
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