Yes. The federal government taxes military retirement pay as ordinary income, the same way it taxes a civilian pension. The IRS treats it as pension income, and you report it on lines 5a and 5b of Form 1040.1Internal Revenue Service. Publication 525 (2025), Taxable and Nontaxable Income Several related payments veterans receive alongside retired pay are fully or partially exempt, and knowing which is which is where most of the money is won or lost at tax time.
Why Your Retired Pay Is Taxable
Federal law defines gross income to include all income from whatever source, and pensions are named explicitly.2Office of the Law Revision Counsel. 26 U.S. Code 61 – Gross Income Defined If your military retirement is based on age or length of service, all of it is taxable. That applies whether you retired under the legacy High-3 system or the Blended Retirement System that became the default for members entering service on or after January 1, 2018.
One thing retired pay does not trigger is FICA. Social Security and Medicare payroll taxes apply to earned income, and retirement pay is not earned income, so nothing is withheld for either.3The Official Army Benefits Website. Federal Taxes on Veterans’ Disability or Military Retirement Pensions
What Is Not Taxed: VA Disability, CRSC, and DIC
Disability compensation paid by the Department of Veterans Affairs is completely exempt from federal income tax. The exemption reaches all VA-administered benefits, not just disability payments.4Office of the Law Revision Counsel. 38 U.S. Code 5301 – Nonassignability and Exempt Status of Benefits Money you receive directly from the VA does not appear as income on your return.
Combat-Related Special Compensation (CRSC) is also tax-free. Federal tax law excludes payments for injuries resulting from armed conflict, extrahazardous service, conditions simulating war, or an instrumentality of war.5Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness CRSC replaces retired pay lost to the VA offset with a combat-disability payment, and the replacement is not taxed.
Dependency and Indemnity Compensation (DIC), paid by the VA to surviving spouses, children, or parents when a service member dies in the line of duty or from a service-connected condition, is likewise tax-free.6VA.gov. About VA DIC for Spouses, Dependents, and Parents
The CRDP Trap
Concurrent Retirement and Disability Pay (CRDP) lets eligible retirees collect both full military retired pay and VA disability compensation without the usual offset. You generally need at least 20 years of creditable service and a VA disability rating of 50 percent or higher.7Office of the Law Revision Counsel. 10 U.S. Code 1414 – Members Eligible for Retired Pay Who Are Also Eligible for Veterans’ Disability Compensation
Here is where retirees get caught. Unlike CRSC, CRDP is taxable. DFAS treats it as a restoration of retired pay rather than a separate benefit. If your retired pay is taxable, your CRDP is taxable. Only if your retired pay is itself non-taxable (because it is based entirely on a disability) does CRDP come out non-taxable.8Defense Finance and Accounting Service. Is it Taxable? Most CRDP recipients retired based on years of service, so in practice CRDP appears on the 1099-R as part of taxable retired pay.
Survivor Benefit Plan annuities paid to beneficiaries are also taxable and reported by DFAS on a 1099-R.9Soldier | Army.mil. SBP and Taxes Fact Sheet Survivors who receive both SBP and DIC should know the SBP portion is taxable and the DIC portion is not.
How TSP Withdrawals Are Taxed
Money you pull from the Thrift Savings Plan in retirement is taxed based on which balance it comes from.
- Traditional TSP: every dollar you withdraw is taxed as ordinary income, including contributions, government matching, and earnings. You deferred the tax going in, so you pay it coming out.10Thrift Savings Plan. Changes to Tax Rules About TSP Payments
- Roth TSP, qualified distribution: if at least five years have passed since January 1 of the year of your first Roth contribution, and you are 59½, permanently disabled, or deceased, the entire withdrawal comes out tax-free.10Thrift Savings Plan. Changes to Tax Rules About TSP Payments
- Roth TSP, nonqualified distribution: contributions come out tax-free, but earnings are taxed as ordinary income and may face a 10 percent early withdrawal penalty.
Tax-exempt combat zone pay you contributed to your Roth TSP is never taxed and never hit with the early withdrawal penalty, whether or not the distribution is qualified.10Thrift Savings Plan. Changes to Tax Rules About TSP Payments
Retroactive VA Ratings Can Bring a Refund
If the VA increases your disability rating or grants a rating retroactively, you have likely overpaid federal tax in earlier years by paying tax on retired pay that should have been offset by tax-free VA compensation. The IRS lets you recover that money with an amended return.11Internal Revenue Service. Veterans Tax Information and Services The same applies to retroactive CRSC.
The window is three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later.12Internal Revenue Service. Topic No. 308, Amended Returns Anything outside that window is gone. File promptly once your rating changes.
Withholding, 1099-R, and Estimated Tax
DFAS withholds federal income tax from your monthly retired pay. The default may not match what you actually owe, and you can adjust it through myPay or by sending DFAS a signed Form W-4. SBP annuitants use Form W-4P instead.13Defense Finance and Accounting Service. Changing Your Federal Income Tax Withholding (FITW)14Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments If you claim exemption from withholding, you must file a new W-4 every year, or DFAS will reset you to single with no adjustments.
Each January, DFAS issues Form 1099-R showing your gross distribution, taxable amount, and federal tax withheld for the prior year. The current form and the two prior years are available through myPay.15Defense Finance and Accounting Service. Getting Your 1099-R
If withholding still falls short because of investment income, rental income, or a working spouse, you may owe quarterly estimated tax. The general rule is that estimated payments are required when you expect to owe $1,000 or more at filing beyond what is withheld. If you retired after age 62 and your underpayment was due to reasonable cause, the IRS may waive the penalty.16Internal Revenue Service. Estimated Taxes
State Taxes Are a Separate Question
Federal tax is only half of it. State treatment varies. A majority of states now fully exempt military retirement pay, either because they have no income tax or because they have enacted a specific exemption. A smaller group offers partial exemptions phased by age or capped by dollar amount. A few still tax military retired pay like any other pension. Check your own state’s current rules before you assume your retired pay is state-tax-free.