Warning: This article involves lots of numbers. Have a beer handy.
Pay as an Afterthought
Leaving the military is inevitable. But, we all eventually leave the profession and move on to something else. Because the function of the military is ultimately to confront and either defeat or deter our Nation’s enemies, many administrative functions are essentially on auto-pilot and require little intervention. The salaries are paid on schedule twice a month and things like our promotion increases are programmed and executed automatically. Except for the occasional pay issue, most of us just assume all of this will take place on its own, and generally it does. When tax season comes, many veterans just saunter over to the nearest tax preparer with their Leave and Earnings Statements and W-2 form on-hand and let the experts do it. In the end, the process seems almost mundane.
As it is something we don’t think much about – and it happens to involve lots of numbers – we rarely take a good look at how much money we actually make while on active duty and how much we have to make as civilians to have the same purchasing power. I should add that I am leaving retirement pay out of this discussion for two reasons: 1. Retirement pay should not figure in your next salary. Try to put that money away as much as possible. 2. Not everyone leaves the military after 20 years of service, and with the new system, the retirement pay is varied. I have placed our base calculation numbers below the article. I have also included links within the article to websites that will be useful to you.
The Average Veteran and Pay
Since he earned almost the exact same amount in the military as he will be earning in his civilian side, we could assume that his quality of life will not change due to salary. But, if we assumed this, we’d be wrong.
Because military entitlement and incentive pay is not taxed, we don’t see a great deal of a tax burden relative to our yearly earnings. This is especially true at the more senior ranks. As an example for this blog article, I will use a fictitious Special Forces E-8 (18Z) who has 23 years in service and is six months from retirement. This fictitious E-8 is assigned to the 7th Special Forces Group and is stationed in Eglin AFB, FL. He is originally a Florida resident. Florida has no income tax. He is airborne and combat diver qualified, and has a 3/3 foreign language proficiency rating in his target language of Spanish. He lives with his wife of fifteen years and has two children, which for a 7th Special Forces Group guy is down right amazing considering how much he was deployed. His wife is finishing a college degree and currently fills the challenging role of home maker and part-time college student. She will graduate in two years and promised she’d make him sell the Harley Davidson as soon as she does. As a result of all of these factors and the various entitlements (BAH, BAS) and incentive pays (Hazardous Duty Assignment Pay, Dive Pay, Foreign Language Proficiency Pay, etc.), this Master Sergeant has an approximate yearly gross income of $106,209 much of which paid for the Harley.
Tax Exemptions and Military Pay Tax Burden
Because his entitlement and incentive pay is exempt, this Special Forces Master Sergeant is not taxed on about 38% of his income before any other exemptions and deductions are applied. This fictitious senior NCO has prepared well for his military-to-civilian transition and already has a job lined-up in Virginia which will pay him $107,000 per year; almost exactly what he made during active service. Since he earned almost the exact same amount in the military as he will be earning in his civilian side, we could assume that his quality of life will not change due to salary. But, if we assumed this, we’d be wrong. Why? Read on.
Throwing Your Own Tea Party
…even though he landed a job for nearly the exact same salary he had while on active duty, he actually took an $11,806 pay cut.
Ever wonder why the TEA (Taxed Enough Already) Party was so pissed-off a few years ago? No? You are about to find out.
In the following analysis we are ignoring many of the various exemptions that one can take when filing his or her taxes for the sake of simplicity, which is damn near impossible when it comes to taxes:
Pay attention to the next two sentences, they are important so as to avoid confusing you. As our Master Sergeant is only taxed on his Base Pay as income, this means that only this part of the salary – which amounts to $65,646 per year – will be used for calculating his tax responsibility. Since we are going to assume a few common tax exemptions and deductions (filling Married Jointly, Child Tax Credit, etc.) on his total Base Pay per year, these exemptions and deductions have reduced his Federal taxable income to about $45,000.
Using a handy chart provided to us by the Tax Foundation – a Washington D.C.-based tax analysis think-tank (https://taxfoundation.org/2017-tax-brackets/) we can now ascertain that our Master Sergeant will be in the 15% tax bracket as his Federal taxable income is $45,000. If we follow the instructions of the table at the 15% tax bracket, we can see that he will pay $5,817 in taxes for the year. So, even though he makes $106,209, only $65,646 of this is taxable by the Federal government, and after some common exemptions and deductions, his Federal taxable income goes down to $45,000.00. In the end, he only pays $5,817 in taxes for the year. In other words, he gets to keep $100,399 of his military yearly salary (Take Home Pay = Entitlement and Incentive Pay, plus Base Pay, minus the taxes he actually paid). Follow me thus far? If so, drink some more beer.
Check on Learning
Ok, if you stayed with me on those numbers, congratulations! That was tough even for me. What is important is that the Special Forces Master Sergeant earned $106,209 that year and only paid $5,817 in taxes because of how much of his military pay is tax exempt and the fact that as a Florida resident, he pays no state taxes here.
Post-Retirement Pay and Taxes: Working for Uncle Sam Forever
Now we move on to the following year and our now-retired Master Sergeant is having his taxes calculated by the local tax preparer. Except for his employer and new state of legal residence (Virginia), his situation remains the same at home. The Harley Davidson is still in the garage. He now earns $107,000 per year. However, to his dismay, he discovers that his taxable income after exemptions and deductions is not $45,000 like last year. This year it is $86,000! WTF?! As a result, he jumps up to the 25% tax bracket (he was in the 15% last year). This year he must pay $12,978 in Federal Income Taxes. But, wait, there is more. Because he moved to Virginia – which does have a State Income Tax – he will pay an additional $5,429 in taxes there. All told, he will pay up $18,407 in taxes.
So, from his new $107,000 yearly salary, he will take home $88,593. In other words, even though he landed a job for nearly the exact same salary he had while on active duty, he actually took an $11,806 pay cut.
So, How Do I Figure Out What I Need to Get Paid?
How do you figure out your required civilian salary after you retire? You could go through all these calculations and come up with an answer. But, the simplest way is to use one of various free tax burden calculators available online. One I happen to like is the one found in “Smart Asset” (https://smartasset.com/taxes/virginia-tax-calculator#rulXlwLIBW). Their nifty calculator gives you a fairly accurate estimate of what your tax burden would be based on salary, location, filing status, as well as deductions and exemptions. When I plugged in the required numbers for our fictitious Master Sergeant, I came up with $145,000 as the required salary to maintain the same lifestyle in terms of take home pay. At $145,000 gross income, he gets to keep $100,351 after taxes.
So, there it is folks. The long and short of it when it comes to your salary as you exit.
Wait, What About My Retirement Pay?
If you earned a retirement pay as you exited the military, you must realize that it will be taxed as regular income by the U.S. Government. So, if you land a job at $80,000 per year, but also get $33,000 in retirement pay a year, the government just adds those two up and taxes them as one salary, to put it simply. Keep this in mind.
Have a very Special Forces Day!
(Sample E-8 (23 Years); 18Z MOS; Married, 2 Dependent Children)
Total Base Salary:
$150.00 (Hazardous Duty Pay Non-Aircrew)
$400.00 (Foreign Language Proficiency Pay)/ 3/3 Spanish
$215.00 (Diving Duty Pay – Combat Diver)
Total Incentive: $13,680/yr
$1872.00 (BAH, w/ Dependents; Eglin AFB FL)
Total Entitlement: $26,883.48/yr