Military families and veterans in New Mexico face unique challenges when managing their state income tax and federal tax obligations. Service members must balance duties like deployment, permanent change of station moves, and retirement planning while ensuring accurate income tax filings. The combination of state exemptions, federal protections, and targeted benefits creates opportunities and complexities for active-duty personnel, military retirees, and surviving spouses.

New Mexico provides notable advantages for military pay, retirement pay, and retirement benefits. Exemptions for active-duty basic pay, phased exclusions for military retirement income, and property tax relief for disabled veterans can substantially reduce taxable value for legal residents. Additional protections under federal law, such as combat pay exclusions and Servicemembers Civil Relief Act coverage, extend support to service members and their families. Understanding how these rules interact helps ensure that honorably discharged veterans and currently serving personnel receive the benefits they qualify for.

This guide outlines gross income reporting, survivor pay treatment, and retirement income exemptions that apply to military retirees and their families. By simplifying federal and state requirements, the guide provides a clear path to filing a compliant tax return while highlighting opportunities for tax breaks available under state and federal provisions.

New Mexico State Income Tax Benefits

Military personnel serving in New Mexico have access to state-level benefits that can significantly lower their tax liability. These advantages focus on reducing income tax for active-duty members, exempting military retirement pay, and providing relief on property taxes for disabled veterans and surviving spouses. Understanding each benefit helps service members and their families plan effectively while ensuring federal and state tax law compliance.

New Mexico exempts all active-duty military pay from state income tax, including basic salary, hazardous duty pay, and family separation allowances. This exemption applies to legal residents and those stationed in the state on official military service. Filing requires Form PIT-1 and Schedule PIT-ADJ, which allows service members to deduct qualifying pay from gross income on their state tax return. This approach ensures that active-duty personnel are not taxed on income earned directly from their military service.

Military Retirement Pay and Retirement Income Exemptions

New Mexico phases in exemptions for military retirement income to reduce the tax burden on retirees. The exemption started at $10,000 in the 2022 tax year, increased to $20,000 in 2023, and rose to $30,000 annually from 2024 through 2026. 

Retired military pay, survivor benefit plan payments, and survivor pay qualify for the exemption. These exemptions acknowledge the continuing contribution of military retirees while ensuring retired pay is not fully subject to state taxes.

• The retirement income schedule provides exemptions of $10,000 in 2022, $20,000 in 2023, and $30,000 from 2024 through 2026.
  
  
• Military retirees eligible for the exemption include honorably discharged veterans and disabled retirees.
  
  
• The exemption reduces taxable value by lessening the retirement income included in gross income.
  
  
• Surviving spouses may also qualify for the exemption under certain conditions.

Property Tax Relief for Veterans

Property tax exemptions support veterans, especially those with service-connected disability ratings. A standard exemption of $10,000 in taxable value is available for veterans or their unmarried surviving spouses who are New Mexico residents. 

Disabled veterans with a 100% service-connected disability rating may qualify for a full exemption on their primary residence, significantly lowering state taxes. These exemptions reduce the property tax burden for eligible veterans and surviving spouses.

• The standard exemption provides a $10,000 reduction in taxable value for eligible veterans.
  
  
• Disabled veterans may qualify for a full exemption on their primary residence with proof of disability percentage.
  
  
• Surviving spouse coverage extends protection to unmarried surviving spouses.
  
  
• Veteran exemption rules apply to honorably discharged veterans who are legal residents.

Residency Rules for Military Personnel

Military service often complicates residency, and New Mexico law provides specific rules to address these situations. A person stationed in New Mexico for official service does not automatically become a resident. Likewise, service members who are legal residents of New Mexico do not lose residency when posted elsewhere. These rules protect families from unexpected tax consequences when orders require relocation.

The IRS Military Family Tax Benefits outlines state and federal tax rules for service members. These resources ensure families can correctly apply exemptions and deductions, maximizing benefits under current tax law.

New Mexico’s income tax, military retirement pay, and property tax exemptions reflect the state’s commitment to its veterans and active-duty personnel. By reducing the burden on gross income, taxable value, and retirement income, these policies support financial stability for military households. Careful planning ensures that military retirees, disabled veterans, and surviving spouses take full advantage of every benefit available under state taxes.

Federal Military Tax Provisions

Military personnel in New Mexico must also comply with federal tax requirements that interact with state-level benefits. The Internal Revenue Service recognizes the unique challenges of military service and provides multiple provisions that reduce taxable income, extend filing deadlines, and account for combat pay. These rules cover gross income, earned income, and other parts of a service member’s tax return, ensuring fair treatment under federal law.

Combat Pay Exclusion

Combat pay remains one of the most significant federal benefits for military service. All combat pay is tax-free and excluded from gross income for enlisted members, warrant officers, and commissioned warrant officers. Commissioned officers face a monthly cap based on the highest enlisted basic pay plus imminent danger pay, which limits the exclusion for higher-ranking officers. The exclusion reduces federal tax liability and allows families to adjust their tax planning when serving in designated combat zones.

Moving Expense Deductions

Permanent Change of Station (PCS) moves create significant expenses, but many costs are deductible under federal law. Eligible expenses include the transportation of household goods, storage, lodging, and travel for the service member and their family. Pets relocated with the family during a PCS order may also be included in the deduction. These deductions apply whether the move occurs inside the United States or to a foreign country, and they remain available even when the taxpayer does not itemize deductions.

Time Extensions for Combat Zone Service

Federal tax rules extend filing deadlines for those serving in combat zones or in direct support roles. The extension covers filing tax returns, paying federal tax due, and contributing to individual retirement accounts. The extension length equals the number of days spent in the combat zone plus an additional 180 days. This provision ensures service members and recently returned veterans have adequate time to manage tax obligations once they leave the combat area.

Additional Federal Considerations

Military service also interacts with self-employment tax, interest income, and retirement savings. Combat pay, while excluded from gross income, may be treated as earned income for IRA contribution purposes. This election allows service members to continue building retirement accounts even when much of their income is tax-free. Federal rules also permit deductions for specific expenses related to military orders, providing flexibility for families facing complex tax periods.

The IRS Armed Forces’ Tax Guide outlines these federal provisions in detail, covering combat pay, moving expenses, and extended deadlines. This resource helps service members and their families apply the correct rules when preparing a federal tax return.

Federal military tax provisions create essential safeguards for active-duty members, military retirees, and their families. From combat pay exclusions to PCS deductions, each rule reflects the government’s recognition of the financial impact of military service. Correctly applying these provisions ensures compliance with federal law while maximizing opportunities for reduced taxable income and improved economic stability.

Combat Zone Tax Exclusions

Combat zone provisions in federal law provide service members with tax relief when deployed to qualifying areas. These exclusions ensure that income earned during dangerous assignments does not increase gross income or federal tax liability. The rules apply to enlisted members, officers, and those serving in direct support roles and certain hospitalizations following service.

IRS-Designated Combat Zones

• The Afghanistan region, including Pakistan and nearby areas, is recognized as a designated combat zone.
  
  
• The Arabian Peninsula includes Iraq, Kuwait, Saudi Arabia, Bahrain, Oman, Qatar, and the United Arab Emirates.
  
  
• The Kosovo area in the former Yugoslavia is recognized as a combat zone under federal rules.
  
  
• The Sinai Peninsula in Egypt is also recognized as a designated combat zone.

Qualifying Service for Combat Zone Exclusions

• Enlisted members, warrant officers, and commissioned warrant officers may exclude combat pay from taxable income.
  
  
• Commissioned officers may exclude pay up to the highest enlisted basic pay plus imminent danger pay.
  
  
• Hospitalization due to wounds, disease, or injury from combat service extends the exclusion period.
  
  
• Reserve members and recently returned veterans may qualify under specific conditions.

Income and Deduction Impacts

• Combat pay excluded under this provision does not count toward gross income for the tax year.
  
  
• Combat pay is earned income and allows retirement accounts such as IRA contributions.
  
  
• Families benefit when basic pay and hazardous duty pay receive tax-free treatment.
  
  
• The exclusion applies whether the service occurs in the United States or a foreign country designated under federal law.

Recordkeeping and Tax Periods

• Deployment orders or official statements verify qualifying combat service for tax purposes.
  
  
• W-2 statements typically mark combat pay with Code Q in Box 12.
  
  
• Exclusions apply only to tax periods that correspond with combat zone service dates.
  
  
• The limits for commissioned officers are adjusted annually to reflect increases in enlisted pay scales.

Combat zone exclusions safeguard service members from increased tax liability during active operations. By removing pay earned in combat from taxable income, federal law acknowledges the risk and sacrifice of those deployed. These provisions support financial security for families while ensuring service-connected duties do not create additional burdens during deployment or recovery.

Federal Contractor Tax Issues

Federal contractors working in combat zones face distinct tax considerations that differ from those of military personnel. While contractors cannot claim combat pay exclusions, many qualify for the Foreign Earned Income Exclusion (FEIE). This provision reduces taxable income by excluding a portion of earnings received while living or working in a foreign country. Understanding eligibility, documentation, and limitations is critical for contractors supporting military operations.

Eligibility and Exclusion Limits

• The FEIE allows qualifying contractors to exclude up to $126,500 in 2024, with annual adjustments for inflation.
  
  
• Housing cost exclusions may apply in addition to the income exclusion, further lowering federal tax liability.
  
  
• The Physical Presence Test requires contractors to spend 330 full days in a foreign country during 12 months.
  
  
• The Bona Fide Residence Test requires contractors to establish a permanent home in the foreign location.
  
  
• Eligible income includes wages, self-employment, and allowances directly tied to overseas work.
  
  
• The exclusion applies only to income earned in designated areas and does not extend to combat pay exemptions reserved for active military personnel.

Documentation Requirements

• Contractors must keep copies of contracts that show employment in a combat zone or foreign country.
  
  
• Travel records verifying the contractor’s physical presence abroad during the qualifying period are required.
  
  
• Housing receipts or proof of lodging costs must be maintained to support claims for housing exclusions.
  
  
• Documentation establishing that the contractor’s tax home is outside the United States is required.

Common Mistakes and Oversights

• Contractors may misreport foreign income or attempt to exclude income not eligible under the FEIE.
  
  
• Some filers fail to meet the time requirements of the Physical Presence Test.
  
  
• Federal law prohibits double-counting by applying the FEIE and other exemptions to the same income.
  
  
• Many contractors omit self-employment tax obligations that remain due even when income is excluded under the FEIE.

The IRS Foreign Earned Income Exclusion page explains how contractors can claim exclusions, determine eligibility, and avoid common filing errors. Federal contractors supporting U.S. military operations overseas face complex tax rules that require careful attention to eligibility and recordkeeping. Applying the FEIE reduces taxable income, ensures compliance with federal law, and helps contractors plan effectively for tax periods during and after foreign assignments.

Servicemembers Civil Relief Act (SCRA) Protections

The Servicemembers Civil Relief Act provides critical protections for military families who face unique tax and financial challenges. These provisions help manage debts, preserve residency, and shield families from unfair tax burdens during military service. By applying SCRA protections, service members and their spouses maintain stability in state taxes and federal obligations.

• Interest Rate Reduction: Pre-service debts, including mortgages, credit cards, and personal loans, are capped at a maximum of 6% interest during active military service. This cap reduces financial pressure and allows service members to focus on military duties without accumulating excessive interest costs.
  
  
• Tax Residency Protections: Military personnel who are legal residents of one state do not automatically become residents of another when stationed there. This rule prevents unintended liability for state taxes in multiple states and safeguards tax return accuracy for military households.
  
  
• Spousal Income Exemption: The SCRA allows the spouse of a service member to maintain residency in their home state. When applied correctly, the spouse’s income may be excluded from taxation in the duty state, reducing double taxation risks and aligning with federal law protections.
  
  
• Collection Action Stays: IRS collection proceedings and state-level enforcement may be delayed when military service materially affects the ability to respond. This safeguard prevents financial hardship caused by aggressive collection efforts during deployments or training.
  
  
• Protection for Surviving Spouse: Certain provisions extend to an unmarried surviving spouse, ensuring they maintain the same residency protections and reduced tax exposure previously available to the service member. This recognition is vital for families navigating financial recovery after loss.
  
  
• Relief for Disabled Veterans: Veterans with a service-connected disability rating may qualify for additional measures. These provisions align Department of Veterans Affairs disability ratings with tax relief, reducing exposure to state income or property tax obligations.

SCRA protections safeguard service members, spouses, and surviving spouses from unnecessary financial stress. The law recognizes the sacrifices made during military service by limiting state tax obligations, reducing interest costs, and delaying collection actions. Applying these provisions consistently ensures that families remain secure, compliant with tax return requirements, and protected under state and federal law.

Military Retirement and Disability Benefits

Military retirement income includes several categories, each with different tax treatments under federal law and New Mexico rules. Retired pay is generally taxable, while state exemptions and disability benefits reduce the taxable value for military retirees, disabled veterans, and surviving spouses. Knowing how these provisions interact ensures accurate tax returns and full use of available relief.

Military retirees report retirement pay on Form 1099-R, which is taxable at the federal level. New Mexico reduces the burden through phased exemptions, excluding up to $30,000 of retired pay or survivor benefit plan payments annually from 2024 through 2026. Disability compensation from the Department of Veterans Affairs remains tax-free in all cases, protecting disabled retirees from additional tax liability.

Comparison of Retirement and Disability Benefits (Federal vs. New Mexico)

1. Military Retired Pay

• Federal Treatment: Fully taxable income.
• New Mexico Treatment: Exempt up to $30,000 through 2026.
• Notes: Applies to all retirees, including reserve military personnel.

2. Survivor Benefit Plan Payments

• Federal Treatment: Taxable at the federal level.
• New Mexico Treatment: Covered by a phased exemption.
• Notes: Surviving spouses are eligible for state-level relief.

3. VA Disability Compensation

• Federal Treatment: Always tax-free.
• New Mexico Treatment: Always tax-free.
• Notes: Includes all service-connected disability benefits.

4. CRDP (Concurrent Retirement and Disability Pay)

• Federal Treatment: Partially taxable.
• New Mexico Treatment: State exemption applies to the retirement portion.
• Notes: Combines elements of both retirement and disability income.

5. CRSC (Combat-Related Special Compensation)

• Federal Treatment: Fully exempt.
• New Mexico Treatment: Fully exempt.
• Notes: Available to honorably discharged veterans with combat-related conditions.

Surviving spouses and disabled veterans may qualify for relief under these provisions. Social Security and retirement savings tools like the Thrift Savings Plan also interact with state exemptions, allowing families to balance taxable and tax-free income. By understanding federal and state rules, military households secure stability while reducing taxable income each tax year.

Common Military Tax Mistakes and Solutions

Military families often face errors when reporting gross income, retirement pay, or combat exclusions. These mistakes can raise taxable income and create unnecessary issues on a tax return. Recognizing frequent errors and applying the right solutions protects service members and their families from added costs.

1. Misapplying Combat Pay Exclusions

Some officers exclude all combat pay, ignoring federal limits. The exclusion is capped at the highest enlisted basic pay plus imminent danger pay, requiring accurate calculations to avoid overstating exclusions.

2. Misreporting State Residency

Military personnel sometimes file as New Mexico residents while legally residing in another state. Being stationed in New Mexico alone does not establish residency, and this mistake can create unnecessary state income tax obligations.

3. Overlooking Deductible Moving Expenses

Permanent Change of Station moves include deductible costs sometimes missed on tax returns. Deductible expenses include household goods transportation, temporary lodging, and family travel, which reduce taxable value when claimed correctly.

4. Errors with Retirement Income Exemptions

Military retirees occasionally neglect to apply New Mexico’s phased retirement pay exemption. Survivor pay and survivor benefit plan payments may also qualify, and failing to claim them increases taxable income.

5. Ignoring Self-Employment Tax for Contractors

Federal contractors working abroad may exclude income under the Foreign Earned Income Exclusion, but overlook self-employment tax. This leaves Social Security and Medicare contributions unpaid, creating future liabilities.

Mistakes in reporting combat pay, retirement income, or deductions create long-term problems for military retirees and service members. Careful documentation, accurate application of exemptions, and understanding of both federal and state law ensure compliance while reducing tax burdens.

State Comparisons for Veterans (North Dakota, New Hampshire, Others)

Definition of State Variations: Military tax benefits differ widely across states. While New Mexico offers exemptions on military retirement income and property tax relief, other states take different approaches. Legal residents must evaluate state income tax rules, property exemptions, and veteran-specific relief before making long-term decisions.

Explainer on States Without Income Tax: New Hampshire and South Dakota do not tax military retirement income because they lack a broad-based state income tax. North Dakota exempts military retirement pay for all retirees, reducing the taxable value reported on a state return. Other states, including Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Mississippi, Missouri, and Nebraska, apply partial or complete exemptions depending on service-connected status and residency.

Explainer on Disabled Veteran Benefits: Many states extend property tax exemptions to disabled veterans and surviving spouses. Exemptions may depend on disability percentage ratings verified by the Department of Veterans Affairs. These benefits reduce property tax burdens, providing substantial relief to households with service-connected disabilities and aligning state-level benefits with federal tax provisions.

State comparisons show that tax benefits differ for military retirees and disabled veterans. Reviewing state laws ensures that families make informed decisions about property ownership and retirement income planning.

Tax Resolution Options and Support Resources

Military families and retirees sometimes face tax debt that requires structured solutions. The Internal Revenue Service and state agencies provide programs to resolve outstanding balances while keeping households compliant with federal law. Following clear steps makes these options more manageable.

Step 1: Evaluate the Balance

Review the tax return and confirm the total liability, including any interest income or self-employment tax due. Accurate records ensure the resolution method chosen matches the situation.

Step 2: Apply for an IRS Payment Plan

Families owing federal taxes can request an IRS payment plan for employment taxes or other liabilities. Monthly installments spread out repayment, reducing immediate strain while meeting federal requirements.

Step 3: Consider an Offer in Compromise

The IRS may accept a reduced settlement for those unable to pay the full amount. This option requires detailed financial disclosure and applies only when repayment in full is unlikely.

Step 4: Seek Relief Programs

Innocent spouse relief or military-specific protections may apply if joint tax liabilities create unfair burdens. Disabled veterans and surviving spouses may qualify for additional relief under state provisions.

Addressing tax debt requires clear steps, accurate documentation, and federal and state programs. By following these paths, military retirees and families can manage obligations while preserving financial stability.

Frequently Asked Questions

Do I need to pay New Mexico state income tax on active-duty military pay?

Active-duty military pay, including basic and hazardous duty pay, is fully exempt from New Mexico state income tax. Service members file Form PIT-1 and use Schedule PIT-ADJ to deduct the exempt income from gross income. This exemption applies to legal residents and those stationed in New Mexico, ensuring families are not taxed on compensation tied directly to military service.

How does New Mexico treat military retirement pay?

Military retirement pay and survivor benefit plan income qualify for New Mexico’s phased retirement income exemption. From 2024 through 2026, up to $30,000 annually is excluded from taxable value for military retirees and surviving spouses. This exemption allows retired military and survivor pay to be partially excluded from state taxes, reducing taxable income for households receiving these benefits.

Are VA disability benefits considered taxable income?

VA disability compensation is always tax-free under federal law and New Mexico state rules. Payments based on a service-connected disability rating or disability percentage adjustment are never included in gross income. Disabled veterans and surviving spouses may also qualify for property tax exemptions that reduce taxable value, offering additional support beyond income tax relief and ensuring long-term financial security for affected families.

Can federal contractors working overseas claim the same tax exclusions as military personnel?

Federal contractors cannot exclude combat pay, which applies only to military service. They may, however, qualify for the Foreign Earned Income Exclusion if they meet residency or physical presence requirements in a foreign country. Eligible income may include wages or self-employment income, though contractors must still pay self-employment tax. Accurate records help maintain compliance with federal law and ensure the correct application of exclusions.

What tax relief options exist for military families with outstanding debt?

Military retirees and families with tax debt can apply for an IRS payment plan for employment taxes or income tax balances. This option allows repayment over time and helps prevent further interest accumulation. In hardship cases, an Offer in Compromise may reduce the total owed. Disabled veterans and surviving spouses may qualify for additional state-level relief, so carefully evaluating all options is essential.

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