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Posted by Dennis Jao

Tax Implication of Transitioning into a Civilian Life

Tax Implication of Transitioning into a Civilian Life

For people who have been in the military for a couple of years and want to transition to civilian life, there are some tax implications to have in mind.

It is essential that you not confuse such a transition as a mere career change. Like your take home pay, tax, and net worth, almost every part of your life will be affected. As a result, arming yourself with adequate information will go a long way to prepare you. 

Here are some things to expect from the transition:

1. Effect on your taxes

Since you are now a civilian, the most significant deduction to expect from your paycheck will be taxes. While you were in the military, some states waived income taxes while the federal government majorly taxes base pay. 

Many things in the military, such as combat pay, housing allowances, cost-of-living adjustments, etc., are not taxed. This is not the same as the civilian world, as you can only deduct a few benefits before taxes. Even at that, a high percentage of the paycheck is taxable. There might also be a state—local, and federal income tax even though this might be absent in some states. 

If you chose to work as an independent contractor or you started your own company, the deductions on your paycheck will not be automatic. However, you will pay estimated taxes, and you will be in charge of managing the payments... 

2. It is essential to take care of Allowances

While in the military, you qualified for special pay and allowances. After transitioning, you must have a list of such allowances and try to calculate their dollar value. With the idea, you can deduce a couple of things:

a. You should have a good idea of your entire military salary after base pay. With this, you can estimate how much you will need to get by as a civilian

b. It also allows you to estimate how much to live comfortably as a civilian. You can calculate your housing budget using Basic Allowance for Housing.

3. Know what you earn

There is a high probability that your pay consists of non-taxable and taxable income for people in the military. Besides your salary, there is a basic allowance for subsistence, a basic allowance for a special day, housing, and others that constitute your total salary.

During active service, while actively deployed, your income might consist of up to six items. While home on leave, there could be four line items. 

4. Understand the Tax Requirement of States

While in active service, you might be located in Texas, a state without an income tax, and posted to a state with income tax, for instance, California. The implication of this is that no income tax while in service. However, this can change if you move to a state with income taxes after leaving the military.

With the above in mind, your location after leaving the military significantly influences your tax. Each state has its unique tax characteristics like tax rate, so you need to come to terms with this. The implication of the tax on your income is essential. For people that plan to retire, a state without retirement military income tax matters. 

5. Pinpoint Major Expenditures

Even though not everyone likes planning, having a household budget is a terrific idea. While making a move from military to civilian, a budget account is a good pointer that can help you locate places where you can bring down your expenditures. 

With fewer expenditures, you will have more cash flows, which will enhance your transition to civilian life. 

6. Work on Your Emergency Savings

It is a good idea to have some funds stashed aside for the rainy day. With this massive move on the way, we recommend having an expense that can take care of six months in case of unplanned occurrences like moving costs, costs for fixing your vehicles, prolonged unemployment, etc.



Dennis Jao
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