Income Tax Considerations for Military Personnel
In the United States, members of the military may be subject to specific tax filing and payment rules that don't affect most taxpayers. While some of these allowances are established at the federal level, others depend on the individual's state of residence, whether they serve in an active combat zone and similar factors. Here's a simple breakdown of what to expect when filing taxes as a member of the Armed Forces.
Combat Zone Pay Exclusions
Military members who serve in designated combat zones receive federal income tax exclusions from the IRS. These exclusions apply to all the military income they earn for months when they spent time in combat zones even if they weren't in the combat zone for the whole month.
This exclusion comes with a few catches. While enlisted personnel, warrant officers and commissioned warrant officers are all eligible, commissioned officers get their exclusions limited to the highest enlisted pay level along with any additional imminent danger or hostile fire pay they earn.
Individuals who serve outside combat zones yet still receive imminent danger or hostile fire pay may still be eligible. For instance, some pilots and others who are stationed outside of combat zones yet perform missions within them get exemptions. Those who reenlist in combat zones but don't receive their reenlistment bonuses until later when they're stationed in non-combat zones can still get the exclusion.
To receive a combat zone pay exclusion from the IRS, service personnel should file their W-2 forms. Each military member's branch of service should have indicated whether they're eligible for a combat zone exclusion on their W-2, but some individuals may need to obtain a corrected W-2 to fix mistakes or omissions.
Military members have special rules for the Earned Income Tax Credit (“EITC”). Normally, you are required to have earned income to qualify for the EITC. Since combat military members have tax-free income, this could be a problem. For this reason, military members can choose whether to count their combat pay; they can do whatever will get them a higher EITC.
Reservists have unique travel deductions. Military members can also receive a few benefits when they are not in combat. Reservists, for example, are better able to deduct travel expenses than the average civilian. They can deduct any travel expense related to serving in the reserves (up to 100 miles). This includes mileage, lodging, tolls, and other similar expenses. They are not required to itemize deductions to take advantage of this benefit.
Military members can sometimes file and pay their taxes later. If the military member is stationed outside of the United States, he or she gets an automatic two-month extension to file a tax return. This applies even without filing for an extension. The rules are much more relaxed if you are in a combat zone as well.
Members of the Armed Forces can sometimes withdraw from their 401(k) without a tax penalty. When Reservists are called away from their full-time jobs to active duty, they sometimes take a pay cut to serve their country. In situations like these, Reservists may be able to withdraw from their retirement plan without a tax penalty.
Special Federal Income Tax Advantages
Military members from all branches have to file and pay income taxes, but there are programs designed to reduce their overall burdens, including:
- The Military Family Tax Relief Act of 2003
This legislation increased the death gratuity available to survivors of deceased military members and exempted such gratuities from taxes. It also created special travel-expense deductions for members of the National Guard and National Reserve whose service forces them to stay more than 100 miles away from home overnight.
- Military taxpayers who want to sell their main residences can get a suspension of ownership-and-use rules. The law also established tax-exempt payments and assistance programs for qualified military academy students and certain others.
- First Time Homebuyer Credit
Since 2009, military members and other employees of the federal government have been allowed to receive special credits when buying their first homes. Although similar programs existed earlier, the 2009 update made the income qualification a bit more accessible and established a $6,500 maximum limit for the credit itself.
It's worth noting that this credit only applies to military members themselves, not their dependents. Taxpayers also have to be at least 18-years-old and file a return that includes a correctly completed statement proving that they actually settled their purchase deal. Remember that although eligible military taxpayers can get extra time to buy residences in the United States and receive the credit, the program only applies to homes that cost less than $800,000, and the IRS has the right to deny credit requests without performing an audit.
Taxes for Veterans
Veterans who are disabled may be able to pursue special tax refunds. These individuals need to have their disabilities certified by the Department of Veterans Affairs, and they can only file amended returns for years when their VA disability percentage increased or when they were granted a new or modified Combat-Related Special Compensation. The IRS advises veterans to check with tax experts before filing amended returns or seeking refunds, as they might have to pay interest and penalties for any errors.
State Tax Laws
Each state implements unique rules about the taxes active-duty military members must pay. For instance, residents of numerous states, including Alaska, California, Connecticut, Nevada, South Dakota, Texas, Washington, Wyoming and Florida, can receive income tax exemptions. Be aware, however, that the exemptions are rarely universal; some apply only to combat-zone pay or basic pay, while others include service pay and allowances.
Different states also establish specific limits on the amount of military income tax exemptions they permit, and these may not perfectly match the federal caps. Regardless whether they believe they're exempt or not, all military personnel still need to file state taxes along with their federal returns by the appropriate deadlines. Failing to do so could result in penalties that aren't exempted.
Military income tax filing laws at the state and federal levels include many situation-specific rules. Although there are numerous exemptions, exclusions and benefits, some may come with eligibility limits and deadlines. It's best to get all of your questions answered and complete your filing as promptly as possible.
Other Benefits for Military Personnel
The Internal Revenue Service has defined several deductions and tax-related benefits to assist our honorable U.S. military members and their families. For starters, military personnel can receive special exclusions on certain types of taxable income. Total compensation for a member of the armed service includes different types of pay and allowances. Some of these pay types can be excluded when calculating taxable gross income. This will effectively reduce the amount of federal income taxes the military member owes.
The military lifestyle calls for a lot of moving and travel that typically extends to family members. Compensation received for certain travel-related expenses may be excluded according to the IRS Armed Forces Tax Guide. Designated exclusions include compensation or reimbursement for a job-related move whether this is due to a dislocation, military base realignment or a standard change in assignment. These allowances may cover expenses for move-in housing, temporary lodging and related expenses such as storage or trailer costs. Travel allowances that may be excluded from gross income also include reimbursement for expenses pertaining to leaves taken between consecutive tours outside the U.S., annual travel expenses for dependent students and per diem.
Compensation or reimbursement for some educational expenses for the service members dependents and emergency allowances fall under the non-taxable category. This exclusion extends to what is know as "Basic Allowance for Housing or Basic Allowance for Subsistence (it also applies to Overseas Housing Allowance received by the personnel).
The IRS also allows the exclusion of re-enlistment bonuses received for an extension signed while the service member was serving in a combat zone, leave pay for the month and student loan repayments applied during the assignment to a combat zone. The Department of Defense defines combat zone designation and may include areas that directly support combat zone operations. For officers, the amount of excluded pay may be capped.
Deductions for Military Personnel
Tax deductions for service members are similar to those applicable to civilians. However, certain considerations are given to military to account for active-duty periods.
Unreimbursed business expenses may be included as a deduction on the tax returns. These expenses may cover some uniform costs, professional dues and certain educational expenses for courses related to the position.
For tax purposes, the home of military personnel is the permanent duty station. Work-related expenses to and from this home may be listed as deductions. These items may include meals, lodging, taxi service, tips and laundry service. Some transportation expenses may also be deductible if they were related to a temporary work or base location.
In the case of a sale of a principal home, as with non-military members, the gains on that sale (up to $250,000 for individuals & $500,000 for joint fillers) are non-taxable. Unlike civilians, however, the five-year test period may be suspended for military personnel serving on qualified official extended duty with the service.
While a less important consideration it is nonetheless important to point out that U.S. military personnel who are stationed outside of the U.S. or in combat zones may not be subject to the same filing deadlines as the general population. These filing deadlines can change from year-to-year.