Military allowances can boost your income. But that doesn’t necessarily mean you’ll pay more in taxes. In fact, most military allowances are not counted as taxable income. This includes the primary allowances for most services members: Basic Allowance for Housing and Basic Allowance for Subsistence.
What are BAH and BAS?
Basic Allowance for Housing. Service members who don’t live in government housing receive BAH, which offsets about 95% of local rental costs. The allowance varies by location, pay grade and dependent status. Because BAH is based on civilian housing costs, service members living in pricier areas receive a larger allowance than those where housing costs are lower.
Basic Allowance for Subsistence. BAS is a monthly payment to help cover the service member’s food costs. BAS rates are tied to the U.S. Department of Agriculture’s food cost index and are adjusted annually.
How does the tax exclusion work?
BAH and BAS are excluded from your gross income. They’re not subject to federal or state income tax or to Social Security/Medicare taxes.
- Reporting — Your Leave and Earnings Statement will list BAH and BAS separately from taxable basic pay. They won’t appear in Box 1 of your annual W-2, so you don’t need to report these allowances as income on your federal and, in most cases, your state tax return.
- Mortgage and property tax deductions — You can use BAH to pay housing expenses and claim deductions. For example, you can deduct mortgage interest and property taxes even if you use your BAH to pay them, according to IRS Publication 3.
- Financial aid and benefits calculations — While BAH and BAS generally don’t count as earned income for the purpose of tax credits such as the Earned Income Tax Credit, they may be treated as income for certain needs-based programs such as Supplemental Nutrition Assistance Program and the Basic Needs Allowance. Always check program rules when applying for benefits.
- Retirement contributions — BAH and BAS are not included in calculating your Thrift Savings Plan or Social Security/Medicare contributions. Only your taxable basic pay is used to calculate TSP matching contributions and Social Security/Medicare taxes.
What is the impact on take-home pay?
BAH and BAS can make up more than 30% of a service member’s total take-home pay. By not being taxed on these allowances, you save thousands of dollars in income tax. In other words, these tax-free benefits boost your net pay and give you more money to cover living expenses or save for the future.
Military pay rules can be complex. A Military OneSource financial counselor can help determine your eligibility for tax deductions. They can also help you plan for major life events such as purchasing a home or separating from service.
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