All non-disability retired pay is subject to withholding of federal income taxes. The amount withheld is dependent upon the taxpayer's amount of wages and the number of exemptions claimed.
The amount withheld is an approximation of the ultimate tax liability. All taxes withheld are forwarded by the respective service to the IRS Center, and the taxpayer claims the amount withheld from his or her retired pay as a credit against his or her final liability shown on his income tax return filed after the close of the tax year. Where the amounts withheld by the Defense Finance and Accounting Service (DFAS) exceed the tax liability shown on the final return, a refund of the overpayment will be made by the IRS Center directly to the taxpayer. Where the amounts withheld are insufficient to cover the final tax liability, one must pay the difference directly to the IRS.
Over-withholding. To avoid having too much income tax withheld, if you have unusually large itemized deductions, alimony deductions, or tax credits, you may claim additional withholding allowances. To set the number of allowances, complete the computation on IRS Form W-4 and submit it to DFAS or your services pay center.
Under-withholding. If your spouse is employed or you work at more than one job, you can avoid having insufficient taxes withheld by completing form W-4 claiming fewer exemptions or asking for additional withholding. These actions may preclude the necessity for submitting a declaration of estimated taxes and making quarterly payments. An agreement for additional withholding is considered as having been ratably withheld over the entire year.