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Global Tax Return Analysis - Military Retirement

Is military retirement pay always taxable?

Alyssa’s question:

Does military retirement income show on the tax return? I have a borrower who listed this information on their application, but I do not see it on the Tax Return.

Linda’s answer:

Great question. I had to do a little digging for you. The short answer, military retirement pay is generally taxable and is reported on a 1099R to the taxpayer. With a full 1040, it is reported on Line 4a or 4b (Line 16 pre-2018 returns). If not all of it is taxable, the 1099R makes it clear how much is.

Military disability retirement pay may not be taxable

If none of it is, a 1099R is not issued. Here is the relevant info from
Publication 525, Taxable and Nontaxable Income. (Use the link to check for the most current info since you may be reading this blog post after changes are made. Go to the index and find ‘armed forces’ or ‘military’.)

Military retirement pay

If your retirement pay is based on age or length of service, it is taxable and must be included in your income as a pension on lines 16a and 16b of Form 1040. (2018 this moved to lines 4a and 4b).

Military and Government Disability Pensions

Certain military and government disability pensions aren’t taxable.

Service-connected disability

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

  • The armed forces of any country
  • The National Oceanic and Atmospheric Administration
  • The Public Health Service
  • The Foreign Service

Conditions for exclusion

Do not include the disability payments in your income if any of the following conditions apply.

  1. You were entitled to receive a disability payment before September 25, 1975.
  2. You were a member of a listed government service or its reserve component, or were under a binding written commitment to become a member, on September 24, 1975.
  3. You receive the disability payments for a combat-related injury. This is a personal injury or sickness that:
    1. Results directly from armed conflict,
    2. Takes place while you are engaged in extra-hazardous service,
    3. Takes place under conditions simulating war, including training exercises such as maneuvers, or
    4. Is caused by an instrumentality of war.
  4. You would be entitled to receive disability compensation from the Department of Veterans Affairs (VA) if you filed an application for it. Your exclusion under this condition is equal to the amount you would be entitled to receive from the VA.

Trust, but verify?

You may want to verify that the retirement income is disability related. If so, perhaps your borrower can provide the year-end ‘pay stub’ or an award letter for your documentation.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.