Tax Exempt Allowances

While all pays are taxable, most allowances are tax-exempt. The primary allowances for most individuals are BAS and BAH, which are tax-exempt. Conus COLA is one allowance that is taxable. A law change mandated that every allowance created after 1986 would be taxable. CONUS COLA was authorized in 1995 and, thus became, the first taxable allowance. Tax savings can be significant as BAS and BAH averages over 30% of a member's total regular cash pay. In addition to being tax-exempt from Federal and State taxes, these allowances are also excluded from Social Security taxes.

Explanatory Example

(Note: using hypothetical pay, allowance and tax rates)

Consider a member who is married and has 1 child (family size is 3). Her annual cash pay is...

Basic Pay $29,008.80
BAH $11,196.00
BAS +$2,899.20
Total $43,104.00

The Federal Income Tax for this person is estimated as $1,223.82 given a family with 3 persons taking the standard deduction for married taxpayers filing a joint return.

The net take-home pay after tax is...

Total Cash Pay $43,104.00
Federal Taxes -$1,223.82
Net Take-home Pay $41,880.18

This person is in the 15% tax bracket and so if taxed on the allowances would pay another $2,114.28 in taxes. But, in order to take home $41,880.18 after tax, we have to add the extra taxes that would be paid on that amount and so on until we added a total of $2,487.36.

Therefore, the salary equivalent or RMC for this person is...

Total Cash Pay $43,104.00
Tax Advantage +$2,487.36
RMC $45,591.36

If all the pay were taxed, the member could pay $3,711.18 federal income tax

RMC $45,591.36
Federal Income Tax -$3,711.18
RMC $41,880.18

and still have the same after tax take home pay.

In personalizing the tax advantage, you have to consider other factors, such as state and local taxes, spousal income, and other income. Suppose this family has an additional $24,000 in taxable income (spouse earnings plus interest earnings in a savings account.) so their total income is $67,104.00. Add on living in Virginia with a tax bracket of 6% and federal bracket of 15% or 21% total.

Their tax advantage is $5,054.40.