5 Tax Tips for Members of the Armed Forces
The IRS offers many military-focused income tax breaks to members of the armed forces. If you have served in a branch of the military, here are five tax benefits that you don't want to miss:
Some Pay May be Tax-Free.
If you've served in a combat zone or in support of one, some or all of your pay may be excluded from your income taxes. However, there may be benefits to claiming this as earned income for the purposed of the Earned Income Tax Credit. Our software will allow you to test claiming your pay both ways to see which provides you with the greatest tax savings.
Additionally, if you are a ROTC student in advanced training and not on active duty, such as summer advanced camp, your pay usually isn't taxed.
Deduct Travel Expenses as a Reservist
If you're a reservist (e.g. National Guard) and you traveled over 100 miles for at least one overnight trip such as attending a drill, you can deduct your travel expenses such parking, tolls, public transit, or mileage provided you weren't reimbursed for them. This may be available even if you do not itemize on your tax return.
Special Tax Treatment for Retirement Plans
The IRS only allows civilians to make IRA contributions if they have taxable earned income, and the contribution limit is based on that amount. The contribution limit is $6,000 for 2020, $7,000 if you are over 50. However, if your income is less than this limit, your contribution is limited to your total taxable income. For example if you earned $2,000, you'd be limited to a $2,000 contribution.
Nontaxable combat pay is allowed to be applied in order to determine a military member's IRA contribution limit. Traditional IRA contributions provide a tax deduction that can be applied against your or your spouse's income.
Combat zone service can also allow you to invest additional funds into a Thrift Savings Plan.
Penalty for Early Retirement Account Withdrawals
If you are a reservist who is called for duty, it may create a financial hardship. If you withdraw funds from a 401(k), IRA, or other tax-deferred retirement plan before you turn 59 1/2, you have to pay a 10% penalty on top of being taxed on the distribution itself. However, going from reserve to active duty can relieve you from the penalty.
Additionally, with the passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act in 2020, the 10 percent early withdrawal penalty may be eliminated if you are under the age of 59 1/2. One third of the money you withdraw will be included as income in your taxes for each of the next three years unless you elect otherwise. The CARES Act also allows you to pay back what you withdrew from your accounts if you’re able to do so.
More Time to File Your Taxes
If you're in the military and on active duty oversees or in a combat zone during the tax filing deadline, and you will receive an automatic two-month extension to the filing deadline. If needed, you can also extend the time to file by an additional 4-months by filing a federal tax extension.