Is Military Retirement Considered Earned Income?
The debate surrounding whether military retirement benefits are considered earned income is a complex and contentious one. For individuals who have served in the military, the answer to this question can have significant implications for their taxes, financial planning, and overall well-being. In this article, we will delve into the details of military retirement and explore the question of whether it is considered earned income.
What is Earned Income?
Before we dive into the military retirement discussion, it is essential to understand what is meant by earned income. Earned income is compensation received from an employer or self-employment in the form of wages, salaries, tips, and self-employment income. In the context of taxes, earned income is subject to income tax and is eligible for deductions and credits. Examples of earned income include:
• Wages from a job
• Tips and gratuities
• Self-employment income
• Alimony
What is Military Retirement?
Military retirement, on the other hand, is a benefit provided to military personnel who have completed a certain number of years of service. The Department of Defense (DoD) offers a variety of retirement plans, including:
- High-3 (High-36 Plan): This plan provides a monthly annuity based on the average of the member’s highest three years of basic pay.
- Final Pay (FBP): This plan provides a monthly annuity based on the member’s final basic pay.
- Disability Retirement: This plan provides a monthly annuity to military personnel who become permanently disabled while serving.
Is Military Retirement Considered Earned Income?
So, is military retirement considered earned income? The answer is somewhat nuanced. In general, military retirement benefits are considered taxable income and are subject to federal income tax. However, the taxability of military retirement benefits varies depending on the type of retirement plan and the individual’s circumstances.
Taxes on Military Retirement Benefits
The Tax Cuts and Jobs Act (TCJA) of 2017 changed the way military retirement benefits are taxed. The TCJA exempted 50% of military disability retirement pay from federal income tax. Additionally, 100% of military retired pay is exempt from state income tax in most states. However, this exemption only applies to disability retirement benefits and not to regular retirement benefits.
Taxed vs. Tax-Exempt Military Retirement Benefits
Here is a breakdown of how military retirement benefits are taxed:
| Type of Retirement Benefit | Taxable or Tax-Exempt |
|---|---|
| High-3/Final Pay | Taxable |
| Disability Retirement | 50% exempt, 50% taxable |
| Reserved Component Retirement | Taxable |
Implications for Taxes
The tax implications of military retirement benefits can have a significant impact on an individual’s financial situation. Military retirees should consider the following:
- Taxation of Social Security Benefits: Military retirees may be entitled to Social Security benefits based on their military service. However, these benefits may be subject to taxation if the retiree’s gross income exceeds certain thresholds.
- Tax-Advantaged Retirement Accounts: Military retirees may be eligible for tax-advantaged retirement accounts, such as the Thrift Savings Plan (TSP) or the Federal Employees Retirement System (FERS).
- Tax-Loss Harvesting: Military retirees may be able to use tax-loss harvesting to offset capital gains taxes on investments.
Conclusion
In conclusion, military retirement is considered taxable income, subject to federal income tax, with some exceptions for disability retirement benefits. While military retirement benefits are not technically considered earned income, the tax implications can be complex and may require careful planning. Military retirees should consider consulting with a tax professional or financial advisor to navigate the tax implications of their retirement benefits and optimize their financial situation.
Appendix
Here is a table summarizing the taxation of military retirement benefits:
| Type of Retirement Benefit | Federal Income Tax | State Income Tax |
|---|---|---|
| High-3/Final Pay | Taxable | Taxable |
| Disability Retirement | 50% exempt, 50% taxable | Taxable (most states) |
| Reserved Component Retirement | Taxable | Taxable |
Note: This table is a summary and may not reflect specific state or local tax laws. It is essential to consult with a tax professional or financial advisor for specific guidance.
