Military Personnel Tax Benefits
In many cases, Uncle Sam recognizes the sacrifices of members of our nation's armed forces and offers special privileges to compensate. When it comes to paying taxes, for example, military members can claim a host of tax advantages that aren't available to civilians.
Earned Income Tax Credit
Members of the Armed Services have an easier time qualifying for the EITC because some forms of military income are non-taxable and don’t need to be included as part of the filer’s total income. Non-taxable military income can include pay earned:
During service in a combat zone
As part of basic allowances for housing (BAH)
As part of basic allowances for subsistence (BAS)
Until you exceed the income cap, the more income you declare, the higher your earned income credit will be. This is why the IRS allows certain groups, including Armed Service members, to declare non-taxable items as “income” for the purposes of this credit.
This is an excellent benefit because it enables you to claim a tax credit on a tax-free income. Service members should calculate their credit in different ways before they decide how much income to declare. The IRS provides an EITC Assistant tool to help you determine your eligibility and explore ways to maximize your credit.
Generally, if you are not eligible for nontaxable income, you cannot take advantage of special service member EITC rules.
Combat Pay Perks
The IRS will let you put tax-free combat pay in the Thrift Savings Plan or an Individual Retirement Account. If you put that money in a Roth IRA or Roth TSP you'll essentially have a pot of money that you've never paid taxes on because qualified distributions from these accounts are not taxed at all. Tax-free in and tax-free out is hard to beat.
Before 2009, military spouses generally had to pay income taxes to the states where their spouses were stationed. But, the Military Spouses Residency Relief Act changed all that. Now, military spouses don't have to pay income taxes to a state that's not their legal residence just because their family is stationed there. And, if the spouse had income tax withheld in the state he or she is living in, filing a return in that state may result in a refund.
Joint returns usually must be signed by both spouses. But if military duties keep you away from home, your spouse can use a power of attorney to file a joint return on your behalf.
Taxpayers, whether civilian or military, can generally sidestep paying capital gains taxes on the sale of a home if they owned and used it as their principal residence for two of the five years before the sale. This rule can be used to exclude up to $250,000 in gains for individuals or $500,000 for married couples. Military members get extra help when it comes to satisfying the two-out-of-five-years test. They're allowed to suspend the five-year test period for up to 10 years when they're on qualified extended duty — that is, assigned to a duty station that's at least 50 miles from their homes for 90 days or more. In effect, they can disregard the time they were ordered away from their home.
Moving every few years can be expensive. But if your move is a required permanent change of station, the IRS lets you deduct the "reasonable unreimbursed expenses" of relocating yourself and your family.
Qualified expenses may include: Travel. Resume preparation fees. Outplacement agency fees.
Tax Deadlines and Extensions
Taxes for all U.S. citizens, including military members, must be postmarked by April 15th of each year or the next business day. However, since military members may be overseas or may be serving in a hazardous combat zone, they are eligible for certain extensions of deadlines. You may be eligible for extensions if you:
Serve in a combat zone
Serve in the Armed Forces outside of the U.S., away from your permanent duty station in a contingency operation; to learn more about contingency operations, please see the IRS website
Spent time in a “missing status,” such as missing in action or as a prisoner of war
Are support personnel (including Red Cross personnel, accredited correspondents, etc.)
Are spouses of Armed Forces service members serving active duty in combat zones or contingency operations, with two exceptions
If you qualify for an extension, your deadline for taking action with the IRS (such as filing your taxes) is extended for 180 days after:
The last day you are in a combat zone or serve in a contingency operation
The last day of any continuous qualified hospitalization for an injury you sustained during service in a combat zone or during a contingency operation
On top of these 180 days, your deadline is extended by how many days were left before you had to take action with the IRS before you started your duty in a combat zone or contingency operation.
Breaks for National Guard and Reserves
If you're called more than 100 miles away from home to perform Reserve duties, you can generally deduct any unreimbursed travel expenses.
If the military prohibits you from wearing certain uniforms when off duty (a rule that usually applies to reservists), you can generally deduct the costs to buy and maintain those uniforms. But you must reduce your expenses by the amount of any uniform allowance or reimbursement you receive.
A call to active duty sometimes creates a financial hardship for reservists. If the reservist addresses the hardship by withdrawing funds from their retirement savings, the IRS may provide accommodation.
You might be able to take money from your IRA, 401(k) or certain other retirement plans without the 10% penalty tax normally applied for withdrawals before age 59 ½, You'll still have to pay income tax on the distribution, but without the extra sting of the penalty.