Military Taxes
Three credits that can put thousands back in a military family's pocket, and the combat-pay choice that changes the math.
New childcare capacity for military families at Naval Base Kitsap. U.S. Navy photo by Amanda McCarthy, DVIDS (public domain).
Three federal credits do most of the heavy lifting for military families: the Earned Income Tax Credit, or EITC (up to $8,046 for tax year 2025), the Child Tax Credit (up to $2,200 per child), and the American Opportunity Tax Credit, or AOTC (up to $2,500 per student). The EITC is a refundable credit for working people with lower income, which means it can pay out as a refund even if you owe no tax.
Junior enlisted families qualify for the EITC more often than they realize, because BAH and BAS do not count as income for it. And if you deployed, you get a choice civilians do not get: whether to count your tax-free combat pay as earned income for the EITC. Combat-zone pay is pay that is tax-free while you are deployed to a designated combat zone, and sometimes counting it in is worth hundreds or thousands of dollars. These are general rules, not tax advice. A free MilTax consultant or VITA volunteer can run your actual numbers.
Here is what each credit is worth and why uniformed families often qualify for more than they expect.
Amounts shown for tax year 2025.
The military edge
Who qualifies: Junior enlisted families qualify for the EITC more than they realize, because BAH and BAS do not count as income for it.
These credits do not find you. File a return and claim them, even if your income is low enough that you are not required to.
Source: IRS · amounts for tax year 2025
The Earned Income Tax Credit is a refundable credit for working people with lower to moderate income. Refundable means it can pay out as a refund even if you owe zero tax. For tax year 2025, the return you file in 2026, the maximum credit is $649 with no qualifying children, $4,328 with one, $7,152 with two, and $8,046 with three or more.
Your earned income and your adjusted gross income, or AGI, both have to come in under the limit for your situation. AGI is your total income minus certain adjustments. For tax year 2025, the ceiling runs from $19,104 for a single filer with no children up to $68,675 for a married couple filing jointly with three or more children, and investment income has to be $11,950 or less.
Here is the military angle most people miss: BAH and BAS are nontaxable allowances, so they do not count toward those limits. A married E-3 or E-4 with children might take home solid total pay once the housing allowance is included, while the taxable base pay on the W-2 sits comfortably inside EITC range. On paper, the IRS sees a much smaller number than what hits your account on the 1st and the 15th. That is why this credit reaches deep into the junior enlisted ranks. One more military-friendly rule: if you are stationed overseas on extended active duty, you still count as living in the United States for EITC purposes.
Pay you earn in a designated combat zone is excluded from federal income tax, so it normally does not show up as earned income. But the tax code gives you an election, which is a choice you can make on your return: you may choose to count your tax-free combat pay as earned income when figuring the EITC. Your combat-pay amount appears on your W-2 in box 12 with code Q.
Why would you add income to a credit that phases out as income rises? Because the EITC is shaped like a hill. The credit climbs as earned income rises, plateaus, then falls. If a deployment left your taxable income low on the front slope of that hill, electing combat pay in can push you up toward the peak and a bigger credit. If you are already past the peak, electing it in shrinks the credit. The move here is simple: calculate the credit both ways and use whichever result is better for you. MilTax software and military VITA volunteers do exactly this comparison.
Deployment can leave your taxable pay low, and the EITC rewards earned income up to a point. That is why service members get a one-of-a-kind choice on this credit.
The election: You may ELECT to count tax-free combat pay as earned income for the EITC. The EITC is shaped like a hill: if a deployment left your taxable income low, electing it in can push you toward a bigger credit.
Know the rules
A free MilTax consultant or VITA volunteer runs this comparison for you.
Source: IRS Publication 3
The Child Tax Credit, or CTC, is worth up to $2,200 per qualifying child for tax year 2025. A qualifying child generally must be under 17 at the end of the year, live with you for more than half the year, be claimed as your dependent, be a U.S. citizen, national, or resident alien, and have a Social Security number valid for employment. Under a 2025 law change, the taxpayer claiming the credit also needs a Social Security number, and on a joint return at least one spouse needs one. The credit phases out above $200,000 of modified AGI, or $400,000 for a married couple filing jointly, which is not a problem most E-4s are wrestling with.
If the credit is bigger than the tax you owe, the refundable piece, called the Additional Child Tax Credit, or ACTC, can pay out up to $1,700 per child for tax year 2025. It is figured as 15 percent of earned income above $2,500, on Schedule 8812. Military wrinkle: for the ACTC, tax-free combat pay counts as earned income automatically. There is no election like the EITC has. So a deployment that zeroes out your taxable wages generally does not zero out your refundable child credit.
The AOTC is worth up to $2,500 per student per year for the first four years of college: 100 percent of the first $2,000 of qualified education expenses plus 25 percent of the next $2,000. Up to 40 percent of it, so up to $1,000, is refundable. The student needs to be enrolled at least half time in a degree or credential program, and for tax year 2025 the credit phases out between $80,000 and $90,000 of modified AGI, or $160,000 to $180,000 for a married couple filing jointly. You claim it with Form 8863, usually working from the Form 1098-T your school sends.
The military catch is no double-dipping. Tuition Assistance and GI Bill payments are tax free, and expenses paid with tax-free education benefits do not count as qualified expenses for the credit. If Tuition Assistance covered your whole tuition bill, there may be nothing left to claim. But out-of-pocket costs like required course materials, or a spouse's tuition not covered by transferred benefits, can still qualify. This one rewards keeping receipts.
File a federal return, even if your income is low enough that you are not required to. These credits do not find you; you claim them. The IRS itself estimates that roughly one in five eligible workers skips the EITC. Use the free filing options you already rate, MilTax or VITA, and bring your W-2, your kids' Social Security cards, and any Form 1098-T.
One timing note so the refund delay does not spook you: by law, the IRS holds refunds on returns claiming the EITC or the ACTC until at least mid-February, even if you file in January. It is a fraud-screening rule, not a problem with your return.
Do military families qualify for the EITC?
Often, yes. BAH and BAS do not count as income for the credit, so junior enlisted taxable pay frequently lands inside the limits, which for tax year 2025 top out at $68,675 for a married couple with three or more children.
Does combat pay count for the Child Tax Credit?
For the refundable portion, the ACTC, yes: tax-free combat pay is included in earned income on Schedule 8812 automatically.
Does combat pay count for the EITC?
Only if you elect it. You can choose to include all of your tax-free combat pay as earned income or none of it, and spouses elect separately. Run the numbers both ways.
Does BAH count as income for the EITC?
No. BAH and BAS are nontaxable allowances and are not earned income for the EITC.
What is the American Opportunity Tax Credit?
A credit of up to $2,500 per student for the first four years of college, up to $1,000 of it refundable, with income phaseouts starting at $80,000, or $160,000 on a joint return, for tax year 2025. Expenses paid by tax-free Tuition Assistance or GI Bill benefits do not count toward it.
Can I get these credits if I owe no tax?
Partly, yes. The EITC is fully refundable, the CTC is refundable up to $1,700 per child through the ACTC, and the AOTC is refundable up to $1,000. You have to file a return to receive any of them.
Why is my refund held until mid-February?
Federal law requires the IRS to hold refunds claiming the EITC or the ACTC until at least mid-February for fraud screening. Filing early is still fine; the refund just releases later.
You do not have to figure this out alone. MilTax offers free software and consultants, reachable at 800-342-9647 through Military OneSource. An installation VITA site offers free in-person prep from volunteers trained on combat pay and the EITC election. The IRS EITC Assistant is an official IRS qualification checker, and IRS Publication 3, the Armed Forces' Tax Guide, is the source document for most military tax rules. All of these are linked in Sources below.
