As tax professionals, it is critical to stay updated on the specific exclusions provided to members of the U.S. armed forces. A recent development from the Internal Revenue Service has clarified the treatment of one-time supplemental payments, reinforcing the broad protections offered under the Internal Revenue Code (IRC).

IRS News Release IR-2026-09: The "Warrior Dividend"

On January 16, 2026, the Department of the Treasury and the IRS issued News Release IR-2026-09, confirming that supplemental basic allowance for housing (BAH) payments made to members of the uniformed services in December 2025 are not taxable.

These payments, which President Donald J. Trump referred to as a “Warrior Dividend,” were funded by a $2.9 billion appropriation in the "One, Big, Beautiful Bill" enacted in July 2025. The supplemental payments consisted of a one-time $1,776 distribution made primarily to active-duty members in pay grades O-6 and below, as well as eligible Reserve Component members of the Army, Air Force, Navy, Marine Corps, and Space Force.

The Statutory Basis: IRC Section 134

The nontaxable status of these payments is rooted in IRC Section 134, which provides the general rule that gross income does not include any "qualified military benefit".

Under IRC Section 134(b), a qualified military benefit is defined as any allowance or in-kind benefit (excluding personal use of a vehicle) that meets two criteria:

It is received by a member or former member of the uniformed services (or their dependent) by reason of their status or service.
It was excludable from gross income on September 9, 1986, under any provision of law, regulation, or administrative practice in effect at that time (other than a provision of the Internal Revenue Code itself).

The IRS explicitly confirmed in its news release that basic allowance for housing (BAH) payments are qualified military benefits under these standards and are therefore excluded from gross income. While Section 134 generally limits modifications to benefits after 1986, Section 134(b)(3)(B) provides an exception for adjustments to cash benefits that are determined by reference to fluctuations in cost, price, or other similar indices.

Practitioner Insights and the Tax Adviser Perspective

In her 2016 article1 for The Tax Adviser, Hannah Bigej, CPA, provides essential context for how these allowances function in practice. Bigej notes that active-duty members receive various types of pay, and each must be carefully evaluated for inclusion or exclusion from gross income.

According to Bigej, the Basic Allowance for Housing (BAH) is traditionally excluded from both gross income and the Form W-2, Wage and Tax Statement. Furthermore, Bigej highlights a significant tax planning advantage: under IRC Section 265(a)(6)(A), a service member can still deduct mortgage interest and real estate taxes on their home even if they use their tax-free BAH to pay those expenses.

Practitioners should advise military clients to review their Leave and Earnings Statement (LES) to ensure that various pay items, such as the supplemental "Warrior Dividend," are being reported correctly and to their advantage.

Conclusion

For federal tax purposes, the $1,776 supplemental housing payment received by service members in late 2025 is a qualified military benefit under IRC Section 134 and should not be included in the taxpayer's gross income. When preparing returns for active-duty personnel, practitioners should refer to IRS Publication 3, Armed Forces’ Tax Guide, for further guidance on the myriad of unique tax considerations facing these clients.

Prepared with assistance from NotebookLM.

Sources

Hannah Bigej, CPA, “Tax Considerations for Active Duty Military,” The Tax Adviser, December 1, 2016, retrieved January 16, 2026, https://www.thetaxadviser.com/issues/2016/dec/tax-considerations-for-active-duty-military/