Paying Taxes on Retired Pay
Title III retired pay, like other income, is subject to federal income taxation. Your Defense Finance and
Accounting Service Center (DFAS) or pay center will withhold a certain amount each month based on the
amount of your pay and exemptions you claim on IRS Form W-4. Each January you will receive an IRS
Form 1099R showing how much was withheld and the amount of taxable retired pay.
Many states (currently Texas does not) also tax retired pay, although there are variances in the amounts
exempted by different state governments.
If you are getting disability compensation from the Department of Veterans Affairs (VA), the amount of the
VA benefit will be deducted from you retired pay. In other words, you will waive a like amount of your
military retired pay in favor of the tax-free compensation. If the VA payment is greater than the retired
pay, you will want to waive the full retired pay.
If (or when) you qualify for Social Security retirement benefits earned on your own covered employment
your reserve retired pay will not reduce you Social Security payments nor will Social Security benefits
reduce your military retired pay.
Civil Service Retirees
If you are a federal civil service retiree or expect to be one, you will be able to credit your active military
service in computing both the civil service retirement and your reserve retired pay. But when you turn age
62, an adjustment might be required to receive annuity credit for active service performed after December
31, 1956, if you will then qualify for Social Security retirement benefits.