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Income Items of Special Interest: Military Taxes (2025 IRS Guide)

This guide covers “Income Items of Special Interest” within military taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 3 (2025), Armed Forces' Tax Guide, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Income Items of Special Interest

Death gratuity to a survivor.

Any death gratuity paid to a survivor of a member of the Armed Forces is excluded from the survivor’s gross income.

Can I deduct expenses paid with my excluded BAH?

As noted in Table 2, BAH is excluded from income. This doesn't prevent you from deducting certain expenses paid for with your BAH. You may still be able to deduct mortgage interest and real estate taxes on your home if you pay these expenses with your BAH. See the Instructions for Schedule A (Form 1040) of your tax return.

Differential wage payments.

Differential wage payments are taxable. They aren't treated as combat zone pay even if the individual was in a combat zone.

What are differential wage payments?

Differential wage payments are payments made by an employer (other than the Armed Forces) to an individual. They are paid for a period during which the individual performed services in the uniformed services while on active duty for a period of more than 30 days. These payments represent all or a portion of the wages the individual would have received from the employer if the individual had been performing services for the employer during that period.

Military base realignment and closure benefits.

Military base realignment and closure benefits paid under the Homeowners Assistance Program (HAP) are generally excluded from income. However, for any property, the sum of all your payments can't be more than the maximum amount described in subsection (c) of 42 U.S.C. 3374 as in effect on November 6, 2009. You must include in income the excess over this maximum amount. For more information about the HAP, see usace.army.mil/Missions/Military-Missions/Real-Estate/HAP/.

Qualified reservist distribution (QRD).

The portion of your QRD reported by your employer as wages on Form W-2, Wage and Tax Statement, is included in your gross income and is taxable. The amount reported should be the QRD reduced by the after-tax contributions to your health flexible spending arrangement. This amount is also subject to employment taxes.

What is a QRD?

With reference to a cafeteria plan or health flexible spending account, a QRD is a distribution to an individual of all or part of the individual's balance in a cafeteria plan or health flexible spending arrangement if:

  • The individual was a reservist who was ordered or called to active duty for more than 179 days or for an indefinite period, and

  • The distribution is made no sooner than the date the reservist was ordered or called to active duty and no later than the last day reimbursements could otherwise be made under the arrangement for the plan year which includes the date of the order or the call to duty.

Uniformed Services Traditional Thrift Savings Plan (TSP) distributions.

If you participate in the Uniformed Services Traditional TSP and receive a distribution from your account, the distribution is generally included in your taxable income unless your contributions included tax-exempt combat zone pay.

If your contributions included tax-exempt combat zone pay, the part of the distribution attributable to those contributions is tax exempt. However, the earnings on the tax-exempt portion of the distribution are taxable. The TSP will provide a statement showing the taxable and nontaxable portions of the distribution. For more information on TSP distributions, see TSPBK26, Tax Rules About TSP Payments.

Note:

For 2025, combat zone service entitles service members to contribute as much as $70,000 in a TSP retirement account.

Note:

The annual additions limit is the total amount of all the contributions made in a calendar year. This limit is per employer and includes money from all sources: employee contributions (tax-deferred, after-tax, and tax-exempt), Agency/Service Automatic (1%) Contributions, and Agency/Service Matching Contributions. It does not include catch-up contributions.

The annual additions limit affects mostly members of the uniformed services who can exceed the annual elective deferral limit. The excess contributions go into the traditional portion of their TSP accounts from tax-exempt pay earned in a combat zone.

Uniformed Services Roth TSP.

Roth TSP contributions are included in your income. They are after-tax contributions and are subject to the same contribution limits as the traditional TSP. Qualified distributions from your Roth account in the TSP aren't included in your income. For more details, see Thrift Savings Plan (TSP) in Part II of Pub. 721, Tax Guide to U.S. Civil Service Retirement Benefits, and TSPBK26.

State bonus payments.

A state bonus payment will be treated as combat zone pay and may not be taxable if it is made because of your current or former service in a combat zone. See Combat Zone Defined, later, for a list of designated combat zones.

What are state bonus payments?

A state bonus payment is a bonus payment made to you or to your dependent(s) by a state (or a political subdivision of a state).

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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