How Much are Military Bonuses Taxed?
The United States military offers various bonuses to its personnel as a way to recruit and retain talented individuals. These bonuses can be attractive, but they are not entirely tax-free. Understanding how military bonuses are taxed is essential for service members to make informed decisions about their financial planning.
Federal Income Tax
When it comes to federal income tax, military bonuses are subject to taxation. The amount of federal income tax owed on a military bonus depends on the service member’s tax filing status and the amount of the bonus. Here’s a breakdown of the federal income tax rates for the 2022 tax year:
| Tax Filing Status | Tax Rate |
|---|---|
| Single | 10% (up to $9,875), 12% ($9,876 to $40,125), 22% ($40,126 to $80,250), 24% ($80,251 to $164,700), 32% ($164,701 to $214,700), 35% ($214,701 to $518,400), 37% (above $518,400) |
| Married Filing Jointly | 10% (up to $19,750), 12% ($19,751 to $80,250), 22% ($80,251 to $171,050), 24% ($171,051 to $326,600), 32% ($326,601 to $414,700), 35% ($414,701 to $622,050), 37% (above $622,050) |
| Head of Household | 10% (up to $14,100), 12% ($14,101 to $53,700), 22% ($53,701 to $85,550), 24% ($85,551 to $164,700), 32% ($164,701 to $214,700), 35% ($214,701 to $518,400), 37% (above $518,400) |
For example, if a single service member receives a $20,000 bonus, their federal income tax liability would be:
- 10% of the first $9,875 = $987.50
- 12% of the next $30,250 ($20,000 – $9,875) = $3,630
- Total federal income tax liability = $4,617.50
State and Local Income Tax
In addition to federal income tax, service members may also be subject to state and local income tax on their military bonuses. The amount of state and local income tax owed on a military bonus varies depending on the service member’s state of residence. Some states exempt military bonuses from state income tax, while others may tax them at a higher rate.
Here’s a table showing the state income tax rates for the 10 states with the highest populations:
| State | Income Tax Rate |
|---|---|
| California | 9.3% to 13.3% |
| Texas | 0% |
| Florida | 0% |
| New York | 4% to 8.82% |
| Pennsylvania | 3.07% |
| Illinois | 4.95% |
| Ohio | 2.8% to 4.2% |
| Georgia | 5.75% |
| North Carolina | 5.25% |
| Michigan | 4.25% |
For example, if a service member living in California receives a $20,000 bonus, their state income tax liability would be:
- 9.3% of $20,000 = $1,860
Other Taxes
In addition to federal and state income tax, service members may also be subject to other taxes on their military bonuses, such as:
- Self-Employment Tax: If a service member is self-employed, they may be required to pay self-employment tax on their military bonus. Self-employment tax is 15.3% of net earnings from self-employment, with 12.4% going towards Social Security and 2.9% going towards Medicare.
- Capital Gains Tax: If a service member sells an asset, such as a car or a house, to receive a bonus, they may be subject to capital gains tax on the profit. Capital gains tax rates range from 0% to 20%.
Tax Planning Strategies
To minimize their tax liability on military bonuses, service members can consider the following tax planning strategies:
- Spread out the bonus: Receiving a large bonus in a single year can trigger a higher tax liability. Service members can consider spreading out the bonus over several years to reduce their tax liability.
- Charitable donations: Donating a portion of the bonus to a qualified charity can provide a tax deduction and reduce taxable income.
- Retirement accounts: Contributing a portion of the bonus to a retirement account, such as a 401(k) or IRA, can provide a tax deduction and reduce taxable income.
- Consult a tax professional: Service members should consult with a tax professional to determine the best tax planning strategy for their individual situation.
In conclusion, military bonuses are subject to federal income tax, and service members may also be subject to state and local income tax, self-employment tax, and capital gains tax. By understanding the tax implications of their military bonus, service members can make informed decisions about their financial planning and minimize their tax liability.
