Leaving the Military = Losing Tax Breaks

By The USAA Educational Foundation

If you’re getting ready to leave the military you’re probably poised for many of the changes that are about to come your way. No doubt you’ve considered things like who you’ll be working for, what you’ll be doing, and, of course, where you’ll be living.

But what about taxes? Have you thought about them? If not, you should, because they’re about to change and if you’re not prepared, you could be in for a nasty surprise. You see, tax-free income – like basic allowance for subsistence (BAS) and basic allowance for housing (BAH) – will be a thing of the past when you leave the military. And if your civilian income is the same as or higher than your total military pay package, those lost tax savings could be substantial.

Expect to Pay More Taxes

To get a better idea of how substantial, let’s look at an example of an E-6 with more than 10 years of service who has a child and lives in San Antonio. This service member’s total annual pay would be roughly $64,250 made up of around $40,375 taxable pay and non-taxable BAS and BAH of about $23,875. Looked at another way, about 37 percent of this military family’s income would be free from income and payroll taxes. If this BAS/BAH combo was instead taxable, (as it would be as a civilian) they could lose more than $300 each month to taxes…and that’s just in Federal taxes. State taxes (if applicable) could make it even more.

Have a Plan

Of course every situation is different, so your specific income tax change could be better or worse than this example. To avoid potential problems, try not to make too many commitments on your civilian take-home pay until you know what it’s really going to be.

Even better, try to set aside some money from each paycheck into a savings account for taxes just in case you end up owing more than you planned when April 15th rolls around. If you end up not needing it, that’s not necessarily a bad thing–at least you’ll have some extra savings set aside and a program to pay yourself first that you can build on to help achieve other goals.

Even with great planning, the transition to civilian life is bound to come with some surprises; don’t let taxes be one of them.

The USAA Educational Foundation, a nonprofit organization, does not endorse or promote any commercial supplier, product, or service.