Military Retired Pay and SBP Premiums: What Is Taxed and What Is Not

By SSgt Christian Horton

Page updated: October 21, 2026 · Official guidance last changed: April 30, 2026

Military retired pay is taxed differently from VA disability compensation, and the Survivor Benefit Plan (SBP) adds a second question: what happens to the money taken out of retired pay for coverage. This guide sorts retired pay into taxable and excluded pieces using IRS Publication 525, Publication 3 and DFAS pages, and walks one invented retiree through the arithmetic for a 2025 return filed in 2026. It covers the SBP premium and what DFAS states about SBP annuitants. For the separate rules on VA payments, see VA disability compensation and taxes.

How retired pay is taxed

Publication 525 says payments received as a member of a military service are generally taxed as wages, except for retirement pay, which is taxed as a pension. Where retirement pay is based on age or length of service, the text says it is taxable and must be included in income as a pension on lines 5a and 5b of Form 1040 or 1040-SR. Publication 3 adds that retirement pay and pensions do not qualify for the combat zone exclusion, so the combat zone exclusion does not apply to retired pay.

The SBP and RSFPP premium

DFAS describes the Survivor Benefit Plan (SBP), the Reserve Component Survivor Benefit Plan (RC-SBP) and the Retired Serviceman's Family Protection Plan (RSFPP) as plans that give eligible beneficiaries an annuity, meaning a monthly payment for the lifetime of the beneficiary. Enrollment is not automatic and there are costs. In most cases the cost is deducted from the retiree's monthly pay, and it is based on the amount of coverage elected.

Publication 525 states the tax rule directly: do not include in income the amount of any reduction in retirement or retainer pay to provide a survivor annuity for a spouse or children under the Retired Serviceman's Family Protection Plan or the Survivor Benefit Plan. In practical terms, the dollars withheld for the premium are not part of the taxable pension amount (line 5b). Whether line 5a shows them depends on how the Form 1099-R reports the pay.

On the beneficiary side, DFAS states that the annuity is a monthly payment for the lifetime of the beneficiary and that its amount is a percentage of the retiree's retirement benefit, based on the retiree's election. DFAS lists tax statements for SBP annuitants alongside those for retirees. Publication 525 points readers to Publication 575 for a more detailed discussion of survivor annuities, but the sources reviewed for this guide do not state how SBP annuity payments are taxed to the beneficiary. For that reason no rule is given here for how SBP annuity payments are taxed to the beneficiary.

Retired pay based on disability

A retiree whose pay is based on a disability falls under a different part of Publication 525, its section on military and government disability pensions. That section says amounts received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces may be excluded from income. For a disability pension based on years of service, Publication 525 limits the exclusion to the part that would have been paid had the pension been based on a percentage of disability; the rest is included in income.

The exclusion applies when any one of these conditions is met:

The retiree was entitled to receive a disability payment before September 25, 1975.
The retiree was a member of a listed service, or under a binding written commitment to become one, on September 24, 1975.
The payments are for a combat-related injury, meaning a personal injury or sickness that results directly from armed conflict, takes place during extra-hazardous service, takes place under conditions simulating war (including training exercises such as maneuvers), or is caused by an instrumentality of war.
The retiree would be entitled to receive VA disability compensation if an application were filed. The exclusion under this condition equals the amount the VA would pay.

VA waiver, CRDP and CRSC

DFAS explains that the general rule of law bars a military retiree from receiving both VA disability compensation and military retired pay at the same time. A retiree may waive retired pay, dollar for dollar, to receive VA compensation (Title 38 U.S.C. sections 5304 and 5305). The limited exception is often called Concurrent Retirement and Disability Pay, or CRDP, a term DFAS says is not used in the law.

For retirees who did not retire under Chapter 61 for disability, eligibility requires entitlement to both payments for the month and a service-connected disability rated at least 50 percent disabling by the VA. DFAS states that, effective January 1, 2014, such members may receive retired pay in full alongside VA compensation.

Chapter 61 disability retirees are treated differently. DFAS says they need 20 years or more of creditable service at retirement, in addition to the 50 percent rating. Even then, the concurrent amount is limited to the retired pay that would have been paid had the retirement been for longevity; the rest remains subject to the waiver. With fewer than 20 years, the dollar-for-dollar waiver applies. DFAS directs these retirees to 10 U.S.C. section 1414(b) and its CRDP page.

Combat-Related Special Compensation, or CRSC, is a separate program for retirees with combat-related disabilities. DFAS calls it a tax-free entitlement paid monthly along with any retired pay already being received. Publication 3 repeats that CRSC is excluded from income, and Publication 525 adds that other portions of military or disability retirement pay may still be included. DFAS lists the conditions: entitlement to retired pay, a VA rating of at least 10 percent, a waiver of VA pay from retired pay, and a CRSC application to the branch of service. The disability must also be combat related: DFAS says this includes injuries incurred as a direct result of armed conflict, hazardous duty, an instrumentality of war or simulated war. A rating and an application alone do not qualify a retiree.

DFAS refers readers to a separate page, Understanding the VA Waiver and Retired Pay/CRDP/CRSC Adjustments, for how the programs interact. DFAS does not state whether a retiree who qualifies for both CRDP and CRSC must choose one.

Payment	Tax treatment	Source
Retired pay based on age or length of service	Taxable as a pension, lines 5a and 5b of Form 1040 or 1040-SR	Publication 525
SBP or RSFPP premium taken from retired pay	Reduction is not included in income	Publication 525
Disability retired pay meeting an exclusion condition	May be excluded, in whole or in part	Publication 525
Retired pay waived dollar for dollar to receive VA compensation	The waived amount is not paid as retired pay. The retroactive refund rules below apply only after a retroactive VA rating. VA compensation itself is covered in the VA guide	DFAS, Publication 525
CRDP (retired pay received alongside VA compensation)	The payment is retired pay, so the pension and disability rows above apply; for Chapter 61 retirees, see the disability row. DFAS describes no separate tax rule	DFAS
CRSC	Excluded from income	Publications 3 and 525, DFAS

Retroactive VA determinations and refund claims

A retiree who retired on years of service and is later given a retroactive VA service-connected disability rating is covered by Publication 525. Retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits that would have been payable. A refund of tax paid on the excludable amount may be claimed, subject to the statute of limitations, by filing Form 1040-X for each previous year in the retroactive period. Each Form 1040-X must include the official VA determination letter, which must show the amount withheld and the effective date.

The reduction equals the effective months multiplied by the amount withheld for that year, using the table in the VA letter for the same tax year as the Form 1040-X. The IRS example uses tax year 2022, an amount withheld of $320.00 effective December 2021, and 12 months: 12 x $320.00 = $3,840.00, claimed in column B of line 1 (adjusted gross income) of the 2022 Form 1040-X.

The special limitations period

Publication 525 states the usual rule: a claim for credit or refund must be filed within 3 years from the time the return was filed. After a retroactive service-connected disability rating determination, that period is extended by 1 year beginning on the date of the determination. The extension applies to claims filed after June 17, 2008, and not to any tax year that began more than 5 years before the determination.

In Example 19, a retiree who retired in 2019 on years of service receives a determination on August 3, 2025, retroactive to 2019. Generally, refunds could be claimed for 2022, 2023 and 2024. Under the special period, a claim for 2021 can also be filed, as long as it is filed by August 3, 2026 (that date has now passed; the example illustrates the IRS rule). Claims for 2019 and 2020 cannot be filed because those tax years began more than 5 years before the determination.

DFAS tax statements and myPay

DFAS says it provides millions of tax statements each year, including IRS Form 1099-R, some mailed and others downloaded from myPay. For tax year 2025, statements for retirees, SBP annuitants and former spouses were available in myPay starting December 16, 2025, with mailed statements sent before January 31, 2026. Retirees without myPay can use telephone self-service or the askDFAS online option, which allows prior-year requests and takes seven to ten business days. A retiree who receives Form 1042-S instead of Form 1099-R is directed by DFAS to call 800-321-1080.

Worked example

The people and numbers in this example are invented. Retiree A retired on years of service, is enrolled in SBP, and files a 2025 return in 2026.

Part 1: retired pay on the return.

Gross monthly retired pay (invented): $2,400
Gross for 12 months: 12 x $2,400 = $28,800
Monthly SBP premium (invented): $150
SBP premium for 12 months: 12 x $150 = $1,800
Amount not included in income under the Publication 525 SBP rule: $1,800
Pension amount that Publication 525 treats as taxable: $28,800 - $1,800 = $27,000

Form 1040 has separate lines for the gross pension distribution (5a) and the taxable amount (5b), so $27,000 would not necessarily appear on both. DFAS does not state how the premium appears on a Form 1099-R, so the statement is the place to start. If the gross distribution shown on it is $28,800, the premium has not been removed, and the $1,800 reduction applies once. If the statement already shows $27,000, the reduction has been taken and subtracting $1,800 again would give $25,200, which would understate the pension amount by $1,800.

Part 2: a retroactive refund claim for one year. Suppose the VA letter for Retiree A shows an invented amount withheld of $410.00 per month, effective for all 12 months of an earlier tax year.

Effective months for that year: 12
Amount withheld per month: $410.00
Reduction for that year: 12 x $410.00 = $4,920.00

Under the method in Publication 525, $4,920.00 would be the reduction entered in column B of line 1 of the Form 1040-X for that year, with the VA determination letter attached.

Limits of this guide

How an SBP annuity is taxed to the beneficiary, how the premium appears on a specific Form 1099-R, and whether CRDP and CRSC must be chosen between are covered in the sections above only as far as the sources state.
It does not explain how a retroactive CRSC award is reported for prior years. DFAS describes the retroactive payment process but not the tax filing steps.
It covers federal income tax only. State treatment of military retired pay varies and is not covered; the state tax agency answers it.

A short checklist

Confirm the basis of retired pay: age or length of service, or disability.
Check the 1099-R in myPay or by mail against monthly pay statements, including any SBP premium, before subtracting the premium again.
Note whether any part of the pay is CRSC, which is excluded from income and requires a combat-related disability.
After a retroactive VA rating, keep the official determination letter showing the amount withheld and the effective date.

Sources

Related guides

By SSgt Christian Horton

Air National Guard member who drives 100+ miles to drill.

Views are my own and do not represent the Department of Defense or the Air National Guard.

General information, not tax advice. How your retired pay, VA waiver and SBP coverage are taxed depends on your own records; IRS Publication 525 and DFAS control, and a tax professional can apply them to your facts.

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