Selling Back Leave at ETS: The Tax Bill Nobody Warns You About
You've got 45, 60, maybe 75 days of leave banked up and you're counting down to your ETS date. Two options on the table: take terminal leave, or sell it back for a lump sum. Most people compare the raw numbers and pick whichever looks bigger — and that's exactly where the tax bill sneaks in.
Here's what actually happens to your money in both scenarios, with real 2026 numbers.
First, the math nobody shows you
Leave sell-back is paid at your average of the highest 36 months of base pay — not your current base pay. For most career-length ETSseparations that ends up being slightly less than your final monthly rate. Then the government treats the whole thing as supplemental wages, which means:
| Deduction | Rate | Notes |
|---|---|---|
| Federal withholding (supplemental rate) | 22% | Flat rate up front, regardless of your actual bracket |
| Social Security (below wage base) | 6.2% | Only if you haven't hit the annual wage base yet |
| Medicare | 1.45% | Always applies |
| State income tax | 0–7%+ | Depends on your state of legal residence |
Add it up and 22–28% of your sell-back vanishes before you ever see it. On a $20,000 lump sum that's $4,400 to $5,600 off the top.
The good news: 22% withholding is just a prepayment, not the final tax. If your actual marginal rate for the year is 12% or 22%, you'll likely get some of that back when you file. The pain is cash flow, not total tax.
Real numbers: selling back 60 days in 2026
Take an E-6 with 10 years in 2026, base pay around $4,300/month. Average-of-3 works out to roughly $4,150/month, or about $138 per day of leave.
| 60 days sell-back | Amount |
|---|---|
| Gross lump sum | $8,280 |
| Federal 22% withholding | –$1,822 |
| FICA + Medicare | –$633 |
| State tax (varies) | –$0 to $580 |
| Check you actually deposit | ~$5,250 – $5,830 |
Terminal leave: the same days, different math
On terminal leave you keep receiving full base pay + BAH + BAS, and there's no supplemental-withholding surprise — it's just your normal paycheck. BAH alone is often $1,500–$2,500/month on top of base pay, money the sell-back option never pays.
The one real trade-off: terminal leave pushes your actual discharge date back, which delays your DD-214 and start of VA benefits or a federal job. If timing matters (starting a job, moving, school start date), selling back buys you time instead.
When selling back still makes sense
- You already have a job lined up that starts before terminal leave would end — the salary beats BAH.
- You're retiring, not separating. Retirees can double-dip: terminal leave plus retired pay starts immediately after.
- Cash flow emergency. The lump sum is real money now, even with the haircut.
- You want the earliest possible DD-214 for VA claims or state benefits that hinge on the separation date.
Run your exact numbers
Don't guess with 5-figure decisions. Our free leave calculator shows your terminal leave value and sell-back lump sum side by side, using your actual rank and years of service. For the paycheck side, the military pay calculator has current 2026 base pay tables — that's the input that drives both numbers. And if you're weighing the whole transition, the separation pay formula guide covers the other lump sum you might be owed.
FAQ
Do I get taxed twice on leave sell-back — federal and state?
Yes, both. The 22% federal rate is flat, and your state of residence taxes it unless you're in a no-income-tax state (TX, FL, WA, TN, NV, SD, WY, AK, NH). Your state withholding on the lump sum follows your LES state, not where you physically live now — worth fixing before your final PCS if they differ.
Is leave sell-back counted as income for VA disability or unemployment?
It doesn't affect VA disability at all — VA compensation is tax-free and separate. For unemployment, some states count lump-sum leave payments as wages that delay your first check, so check your state's rules before filing.
Can I sell back more than 60 days?
No — 60 days is the career cap for most service members, and any leave you sold back earlier (e.g., at a re-enlistment) counts against it. Your final LES shows how much room you actually have.
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