Your First Tax Return After Retiring From the Military: What's Different

Your First Tax Return After Retiring From the Military: What's Different This Year

Somewhere between out-processing paperwork, a final PCS, and figuring out what civilian job comes next, taxes are probably not at the top of your mind the year you retire. They should be closer to it than usual, though — because the year you transition out of active duty is one of the most complicated tax years you'll ever file, and it only happens once.

Here's what actually changes.

You may have three (or more) kinds of income in one year

If you retired partway through the calendar year, your return likely includes active-duty military pay for part of the year and retired pay for the rest — each reported on separate forms, taxed differently, with different withholding already applied. Add a civilian job, and you've got a third income stream with its own W-4 and withholding assumptions that probably weren't coordinated with the other two.

Individually, none of these are complicated. Together, in the same year, they're the most common reason military retirees end up owing more than expected — or get a smaller refund than they're used to.

Your withholding almost certainly needs a second look

DFAS applies default withholding to your retired pay, but that default doesn't know about your other income sources. Neither does a new civilian employer's default withholding, for that matter.

If nobody adjusts for the combined picture, it's easy to end up under-withheld for the year, which shows up as a tax bill instead of the refund you were expecting. This is worth checking well before year-end, not in April.

VA disability doesn't complicate anything — it just doesn't show up

If you're also receiving VA disability compensation, that income is not taxable and doesn't appear on your 1099-R. It's easy to worry that a rating decision mid-year adds tax complexity; it generally doesn't.

The one thing worth double-checking is whether a new or changed VA rating affects your eligibility for CRDP, which is taxable, or CRSC, which isn't.

The Survivor Benefit Plan changes your numbers quietly

If you elected SBP coverage, premiums are typically deducted before tax, which reduces the taxable retired pay shown on your 1099-R compared to your gross pension amount.

It's a good thing — just make sure the number on your return matches what you expect, especially in the first year when everything on the form is new.

Where you live now matters more than it used to

Active-duty service members often keep a state of legal residence that has nothing to do with where they're stationed. Once you retire, that flexibility mostly goes away — your tax home generally becomes wherever you actually live.

If you moved as part of your transition, this is the year your new state's treatment of military retirement pay starts to matter. Some states fully exempt it, some tax it like any other income, and the difference can be significant.

A few numbers worth having ready

When you sit down to file — or sit down with a preparer — the transition year goes a lot smoother if you have:

• Your final active-duty W-2

• Your first 1099-R for retired pay

• Your VA award letter, even though it's not taxable, because it documents your rating for CRDP/CRSC purposes

• Your SBP election paperwork

• A W-2 from any new civilian employer

Why this year is worth extra attention

Every year after this one tends to look more like a normal retiree's return: one or two steady income sources, predictable withholding, fewer moving parts.

This first year is the exception, and it's also the year where a mismatched withholding assumption or a missed state exemption is most likely to slip through. It's the one year where a few extra minutes of attention — or a conversation with someone who's seen this transition before — tends to pay for itself.

Retiring this year, or did you retire recently and want a second look at how it was handled? Schedule a consultation — the transition year is exactly what we specialize in.

This post is for general educational purposes and isn't personalized tax advice. Please consult a qualified tax professional about your specific situation.