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.
(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...
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...
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...
If all the pay were taxed, the member could pay $3,711.18 federal income tax
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.
The Regular Military Compensation calculator can be personalized with your situation to estimate your tax advantage.