When life happens: Navigating a retirement with confidence

By The Department of Defense Office of Financial Readiness

If taxes are one of the only guarantees in life, here’s another certainty: Your taxes after you retire from the Army will look a lot different. Before you transition, consider what it will mean to leave behind tax-free allowances and take on more than one income stream.

Here are five tax considerations to keep in mind as you prepare for life as a veteran.

1) The tax-free benefits you currently receive will require a larger post-retirement income to maintain the same standard of living. For example, if you receive $2,000 a month for Basic Allowance for Housing (BAH), you will need more than $2,000 to afford the same house or apartment after you retire from the Army. This is because when you retire, more of your income will now be subject to taxes, and you will need to use this income to cover expenses that were previously covered by your tax-free allowances. 

Use the Department of Defense’s (DoD) Regular Military Compensation (RMC) calculator to determine how much you will need to earn to maintain your standard of living. You can find several detailed examples on the Financial Planning for Transition Participant Guide available on the Army Transition Assistance Program (TAP) website. 

2) Your taxable income will change after retirement, which means your tax bracket may change. If you’re planning a second career, you will go from one monthly salary to multiple sources of income: military retirement pay, civilian wages, and possibly compensation from the Department of Veterans Affairs (VA). While VA disability payments are taxfree, Army retirement pay is not. (It is, however, exempt from Social Security payroll taxes.)

If your retirement pay is $50,000 a year and you take a civilian job making $100,000, for example, your federal, taxable income will be $150,000, minus pre-tax deductions like health insurance, flexible spending accounts (FSAs), the Survivor Benefit Plan (SBP), and 401(k) contributions. If you calculate your deductions for your retirement and civilian income separately, you will likely owe money on Tax Day.

Input your total taxable income into the Internal Revenue Service’s (IRS) Tax Withholding Estimator to find out how much you should increase your tax withholdings to avoid owing money at the end of the year. Instead of taking two deductions from your retirement pay and three from your civilian pay, you may need to take two from each or forgo deductions from your retirement pay. Or it may be easier to have an extra dollar amount withheld from each paycheck.

3) That withholding calculator will also come in handy if your retirement will also mean a change in employment for your spouse. Many Army spouses use this time and the increased geographic stability as an opportunity to start or restart their own careers. While this will probably increase your household income and improve your family’s financial wellness, it will also change your tax liability if you file jointly. 

4) If you’re planning on settling in a different state after you retire, you should expect your state taxes to change as well. Because service members are not required to change their legal residence when they receive permanent change of station (PCS) orders, many Soldiers choose to retain their residency in states with low or nonexistent state taxes. That benefit ends upon military retirement. You will have to pay state taxes in the state where you live.

The good news is that many states don’t tax military retirement pay, or they only tax a portion of it. Army Echoes published a map highlighting these states in its February 2024 issue. You can learn more details about the tax benefits each state offers military retirees on myarmybenefits. us.army.mil, and access the MyArmyBenefits calculators at the same webpage with a secure DS Logon or with your Common Access Card (CAC).

5) All service members have access to free tax help from MilTax, a benefit that continues for a year after retirement. MilTax experts are well-versed in military-specific tax situations, so don’t hesitate to ask for assistance long before filing your first post-Army W2. After that, know that many tax preparation services offer discounts for veterans. 

You can also meet with a trusted personal financial manager or counselor to discuss the financial implications of retirement. Reach out to your nearest installation and make an appointment with an expert who can help you create a retirement spending plan.

As you reach new milestones and complete your service’s financial readiness training, look to the DoD Office of Financial Readiness (FINRED) and your service for trusted additional resources. You can follow @DoDFINRED on Facebook, Instagram, LinkedIn, X and YouTube, and download the free DoD financial literacy app, Sen$e, for financial tips on the go. Find it in the Google Play and iOS app stores.