Service Members Tax Relief Act Proposes 100% Federal Tax Exemption on Active and Reserve Pay

If you are currently serving in the military, this bill is a game-changer for your paycheck. The Service Members Tax Relief Act proposes a complete overhaul of how the federal government treats military income. Specifically, it amends the Internal Revenue Code to exclude all compensation received for service as an active or reserve member of the U.S. Uniformed Services from your gross income for federal tax purposes (Sec. 2).

The Take-Home Pay Boost

What does 'excluding from gross income' actually mean? It means that the federal government would stop taking income tax out of your military pay, period. For service members—whether you’re active duty or drilling with the reserves—this translates directly into a significant jump in net take-home pay. Imagine a Staff Sergeant (E-6) with 10 years of service. That person currently pays federal income tax on their base pay. Under this bill, that tax liability goes to zero, effectively acting as a massive, immediate pay raise.

Who Gets the Break and Who Doesn't

This exemption is laser-focused on the pay earned while actively serving. The bill is quite clear that this tax break does not apply to pensions or retirement pay (Sec. 2). That means military retirees drawing a pension will continue to pay federal income tax on that income just as they do now. This distinction is crucial: the relief is aimed squarely at the people currently in uniform, actively serving, and often dealing with the unique financial strains of deployments, relocations, and being away from the civilian job market. For active-duty and reserve families juggling rising costs, this added income could be the difference-maker for childcare, saving for a home, or paying down debt.

The Fiscal Trade-Off

While the benefit to service members is undeniable, the flip side is the impact on the federal checkbook. Exempting all military pay from federal income tax means a substantial reduction in tax revenue flowing into the U.S. Treasury. This is the inherent trade-off with any broad tax exemption: the government loses revenue, but the targeted group gains purchasing power and financial relief. The bill’s intent is clearly to provide a major financial incentive and reward for military service, and it achieves that by creating a tax-free income stream for those actively in uniform. The change would apply to income earned in taxable years beginning after the date the law is enacted, meaning the relief would kick in almost immediately once signed.