For tax purposes, military pay is treated like regular income, while parts of National Guard pay have special treatment. Before the passage of the Tax Reform Act of 1986, National Guard members could deduct 100 percent of their travel expenses. After the Act went into effect, only those travel expense items exceeding 2 percent of their adjusted gross income could be deducted, according to Military.com.
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All members of the National Guard receive W-2s showing their total taxable wages and the federal, state and Social Security taxes withheld from those wages. Military.com reports that Guard members may also have their pay double taxed as members are paid the difference between their civilian pay and their active duty pay. Civilian employers may report their full salary for the members without subtracting military pay. Military finance will also take taxes out of the member’s deployment paycheck. The member must obtain a corrected W-2 or adjust the income on their tax return with a descriptive narrative.
For the most current information concerning all aspects of the tax treatment of National Guard and other military personnel, resources such as the Military.com Tax Guide, IRS Publication 17 or arrange a consultation with a tax professional, according to Military.com.
The Defense Finance and Accounting Service (DFAS) handles all issues concerning military pay. Unclaimed pay or entitlements can be claimed by active duty and there is a six-year statute of limitations on the collection of pay or entitlements for those separated from the service, according to UnclaimedAssets.com. The DFAS also provides safekeeping services for the storage of U.S. Savings Bonds up to one year after a member separates from the armed forces.
Certain National Guard pay is exempt of state taxes in only two states, according to Answerbag.com. National Guard pay for weeknight and regular weekend drills; summer camp; riot duty, if nationalized by the president; and duty related to Hurricane Katrina is exempt of Michigan state taxes.
In Oregon, the Combat Zone income is excluded from state and federal taxation. Answerbag.com reports that since 1991, military pay earned outside of Oregon is exempt from Oregon taxes. Calculation of military pay earned inside Oregon is much more complicated. Consultation with a tax professional may be recommended. Army Times reports that exit bonuses and separation pay are tax exempt when coded as a “mustering out” payment, as well as retired pay and survivor benefits in New Jersey.