Serving in the National Guard or Reserves usually means drilling far from home, deploying on short notice, and covering some of the cost out of your own pocket. The tax code recognizes that burden with several provisions that few service members fully use, and the savings can be meaningful at filing time. This article walks through the military tax deductions and exclusions available to Guard and Reserve members, plus a credit for the employers who keep paying them during active duty.
Quick answer: National Guard and Reserve members have four main federal tax benefits. Reservists who travel more than 100 miles from home for duty can deduct unreimbursed travel as an above-the-line adjustment on Form 2106. Pay earned in a combat zone is excluded from taxable wages. Reservists called to active duty for more than 179 days can pull money from retirement accounts without the 10% early-withdrawal penalty. And employers who make up the wage gap for activated employees can claim a credit under Section 45P. Ohio layers on its own exemption for military pay earned while stationed outside the state.
Because these rules interact with your W-2, your state return, and your retirement accounts, they reward planning during the year rather than a scramble in April. Pease Bell CPAs helps service members and their employers sort through them through our tax advisory services.
The 100-mile rule: deducting reserve travel on Form 2106
One of the most underused benefits at tax time is the Armed Forces reservist travel deduction, often called the 100-mile rule. Members of a reserve component, which includes the National Guard, may deduct unreimbursed travel expenses when the travel is overnight and takes them more than 100 miles away from home in connection with their service. This covers the kind of trips that come with drill weekends and annual training in another part of the state or country.
The deductible categories include mileage at the standard federal rate, parking, ferry fees, tolls, and lodging. Meals are also covered, but with a limit worth understanding: the deductible amount is based on the federal meals and incidental expenses per diem rate, and that figure is then subject to the standard 50% limitation on meals. It is not simply half of what your receipts show.
These expenses are reported on Form 2106 and treated as an above-the-line adjustment, which means you do not have to itemize to claim them. The deduction flows to Schedule 1 of your Form 1040 and reduces your adjusted gross income directly, lowering the income your tax is calculated on. Reservists are one of the few groups still permitted to use Form 2106 after the 2017 tax law suspended most unreimbursed employee expenses, so the benefit is genuinely distinct.
There are limits. Your deduction cannot exceed the regular federal per diem rate for lodging and meals and the standard mileage rate for driving. Just as important, you cannot deduct any expense you were already reimbursed for. If you received mileage, per diem, or a payment through the Defense Travel System for a given trip, those amounts are netted out and are not deductible. For the exact mechanics, the IRS Form 2106 instructions lay out how reservists calculate the adjustment.
The combat zone tax exclusion
If your Guard or Reserve service takes you to a designated combat zone, a large share of your military pay becomes tax-free. The exclusion covers basic pay for the months you serve in the zone, along with reenlistment and enlistment bonuses, certain student loan repayments, and imminent danger or hostile fire pay. This is one of the most valuable military tax benefits precisely because it removes income from tax entirely rather than merely deducting an expense.
Excluded combat pay is reported on your Form W-2 in Box 12 with code Q, and it should not appear in your Box 1 taxable wages. Because errors here directly affect your taxable income, it is worth checking your W-2 carefully when it arrives to confirm that the combat pay was excluded from Box 1. Note that the pay is still subject to Social Security and Medicare tax, so you will see it reflected in Boxes 3 and 5.
The exclusion is unlimited for enlisted members and warrant officers. Commissioned officers, however, face a monthly cap tied to the highest rate of enlisted pay plus imminent danger or hostile fire pay. For 2025 that ceiling is $10,983 per month, so an officer excludes combat pay only up to that amount. The IRS explains the full set of rules in Publication 3, the Armed Forces’ Tax Guide.
Qualified reservist distributions from retirement accounts
Guard members and Reservists ordered to active duty for more than 179 days, or for an indefinite period, gain access to a lesser-known retirement provision called the Qualified Reservist Distribution. Under Internal Revenue Code Section 72(t)(2)(G), these members can take distributions from an IRA or from the elective-deferral portion of a 401(k) or 403(b) plan without the usual 10% early-withdrawal penalty, provided the distribution is taken during the active-duty period. For a service member facing a drop in civilian income during a deployment, that penalty-free access can be a genuine lifeline.
The benefit does not stop at penalty relief. The service member may recontribute the distributed amount within the two-year period beginning the day after active duty ends, and those repayments are not subject to the normal annual contribution limits. In effect, you can use the money when you need it and then rebuild your retirement savings afterward without losing years of contribution room. One technical point: recontributions are made to an IRA, and they establish basis reported on Form 8606 rather than going back into the original employer plan.
Keep in mind that the distribution is still subject to ordinary income tax in the year you take it. The Section 72(t) rule waives only the 10% penalty, not the income tax. Coordinating the timing of a distribution with the rest of your income for the year is where planning pays off, since a large withdrawal in a low-income deployment year may cost far less in tax than the same withdrawal in a high-income civilian year.
The Section 45P credit for employers of activated reservists
The tax code also rewards the businesses that stand behind their Guard and Reserve employees. Under IRC Section 45P, an employer that makes differential wage payments, meaning payments that bridge the gap between an employee’s civilian salary and their lower military pay, may claim a credit equal to 20% of up to $20,000 of those payments per employee. That works out to a maximum credit of $4,000 per activated employee each year. The employee must have worked for the business during the 91-day period before the active duty began and must be on active duty for more than 30 days.
A common misconception is that only small employers qualify. When the credit was first enacted it was limited to businesses averaging fewer than 50 employees, but the Protecting Americans from Tax Hikes (PATH) Act of 2015 removed that size restriction and made the credit permanent for tax years beginning after December 31, 2015. Today an employer of any size can claim it. The current statutory text is available through the Cornell Legal Information Institute’s copy of IRC Section 45P.
For employers who have never claimed the credit, this is a place to review open prior-year returns. If you paid differential wages to an activated employee and did not take the credit, an amended return may recover it, subject to the general statute of limitations. Businesses that want help quantifying the credit or documenting eligibility can contact our tax team to review their payroll records.
Ohio tax benefits for National Guard and Reserve members
Ohio adds its own set of benefits on top of the federal rules, which matters for the many service members who call Ohio home. Because Ohio’s individual income tax starts from federal adjusted gross income, combat pay that is already excluded federally never enters the Ohio calculation either. There is no separate step to exclude it in Ohio; it is simply out because it was never in your federal AGI to begin with.
Ohio also allows resident service members to deduct military pay and allowances earned while stationed outside Ohio. This deduction is especially useful after basic training or a longer military school held in another state, since that active-duty pay can be subtracted to the extent it is included in your federal AGI. The key word is stationed, which refers to your permanent duty station rather than wherever you happen to be for a short assignment. The deduction is not available for pay earned while stationed in Ohio. The Ohio Department of Taxation’s guidance for military servicemembers covers the specifics.
Taken together, these provisions can remove a substantial portion of a Guard or Reserve member’s income from both federal and Ohio tax. As always, the benefits depend on good records and accurate documents, so keep track of your travel expenses, review your W-2 the moment it arrives, and confirm how your active-duty pay is being sourced. For questions about how these rules apply to your situation, reach out to a Pease Bell tax professional.
Frequently Asked Questions
What is the 100-mile rule for National Guard and Reserve members?
The 100-mile rule lets reservists deduct unreimbursed travel expenses when their reserve duty takes them overnight and more than 100 miles from home. Deductible costs include mileage at the standard rate, tolls, parking, lodging, and meals, though the deduction is capped at the federal per diem and mileage rates. It is reported on Form 2106 as an above-the-line adjustment, so you can claim it without itemizing.
Is combat pay taxable for National Guard members?
No. Military pay earned in a designated combat zone is excluded from taxable income, including basic pay, bonuses, and imminent danger pay. It appears on your W-2 in Box 12 with code Q and should not be included in your Box 1 wages. Enlisted members and warrant officers get an unlimited exclusion, while commissioned officers are capped at a set monthly amount.
Can reservists withdraw from a 401(k) or IRA without penalty?
Reservists called to active duty for more than 179 days can take a Qualified Reservist Distribution from an IRA or the elective-deferral portion of a 401(k) or 403(b) without the 10% early-withdrawal penalty. The distribution is still subject to ordinary income tax, but the amount can be recontributed to an IRA within two years of the end of active duty without regard to the normal contribution limits.
Do employers get a tax credit for paying activated reservists?
Yes. Under IRC Section 45P, an employer that makes differential wage payments to an employee on active duty for more than 30 days can claim a credit of 20% of up to $20,000 of those payments per employee, a maximum of $4,000 per employee per year. Since the 2015 PATH Act, this credit is available to employers of any size, not just small businesses.
Does Ohio tax National Guard pay?
Ohio does not tax combat pay, because that income is already excluded from the federal adjusted gross income that Ohio’s tax is built on. Ohio also lets resident service members deduct military pay and allowances earned while stationed outside the state, such as during out-of-state basic training or military schooling. The deduction does not apply to pay earned while stationed in Ohio.
