The IRS has made available several tax breaks for military personnel, especially over the last few decades. For federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard is also included, but not the U.S. Merchant Marine or the American Red Cross. Some of these tax breaks are retroactive, and thus require the filing of an amended return by the affected taxpayer. Remember that if you away from home because of duty in the military, your spouse can use a power of attorney to file a joint return on your behalf. Here are ten tax breaks worth noting for military personnel.
- Deadline Extensions for Tax-Related Actions
Military personnel may qualify for a deadline extension for several tax-related actions, including:
- Filing returns.
- Paying taxes.
- Making claims for refunds.
- Contributing to IRAs.
The various extensions granted to combat zone participants to file returns or pay taxes will also apply to those serving in Contingency Operations, as designated by the Secretary of Defense.
- Combat Pay and Retirement Contributions
If you are a member of the Armed Forces serving in a designated combat zone, then you can exclude certain pay from your income. The month for which you receive this pay must be a month in which you either served in a combat zone or were hospitalized as a result of wounds, disease, or injury obtained while serving in the combat zone. You need only serve for one or more days in a month to qualify for exclusion for the entire month. A few examples of pay types eligible for exclusion include:
- Active duty pay earned in any month you served in a combat zone
- Imminent danger/hostile fire pay
- A reenlistment bonus if this extension occurs in a month you served in a combat zone
- Pay for accrued leave earned in any month you served in a combat zone
- Portion of any student loan repayment made for the year while serving in a combat zone
It is important to note that retirement pay and pensions do not qualify for combat zone exclusion. In some cases, service outside a combat zone can be considered service in a combat zone if the Department of Defense designates it in direct support of military operations in the combat zone, or if the service qualifies for duty subject to hostile fire or imminent danger pay.
The IRS will let you put tax-free combat pay in Roth Thrift Savings Plan or an Individual Retirement Account. qualified distributions from these accounts are not taxed at all. Until you hit the limit, the Roth TSP is a smart choice for combat-zone TSP contributions since withdrawals of contributions and earnings tax-free.
- Housing and Moving Expenses
If qualifying military personnel must move and it is a required permanent change of station, the IRS allows the deduction of the “reasonable unreimbursed expenses” of relocating. This includes the expense in moving the entire family not just those in the military.
- Certain Home Sales
Taxpayers, whether civilian or military, can generally avoid 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 are allowed special considerations in meeting the requirements of the two-out-of-five-years test. The five-year test period may be suspended for up to 10 years if on qualified extended duty, which is the circumstance where military personnel are assigned to a duty station that’s at least 50 miles from their homes for 90 days or more. The rules and regulations regarding this are complicated and require the assistance of a professional tax advisor and attorney.
A taxpayer on qualified official extended duty in the U.S. Armed Services or the Foreign Service may suspend for up to 10 years of such duty time the running of the 5-year ownership-and-use period before the sale of a residence. This applies when the duty station is at least 50 miles from the residence or while the person is residing under orders in government housing for a period of more than 90 days, or for an indefinite period. This election, may only be applied to one property at a time.
- Death Benefit Payments
The death gratuity paid to survivors of deceased Armed Forces members is $12,000 and is not taxable. Effective for deaths occurring after September 10, 2001.
- Waived Penalties
A call to active duty sometimes creates a financial hardship for reservists. If the reservist addresses the hardship by withdrawing funds from retirement savings, he or she may be able to take money from an IRA, 401(k) or certain other retirement plans without the 10% penalty tax normally applied for withdrawals before age 59 ½. They must still pay income tax on the distribution, but without the penalty.
- Payment of State Income Tax
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 has altered this by mandating that military spouses don’t have to pay income taxes to a state that’s not their legal residence only because the member of the military and his or her family is stationed there. Also, if the spouse had income tax withheld in this state, filing a return there may result in a refund.
- Travel Deductions
If military personnel must travel more than 100 miles away from home to perform reserve duties, generally any unreimbursed travel expenses may be deducted.
- Uniform Costs
Personnel may generally deduct the costs to buy and maintain uniforms where the military prohibits you from wearing certain uniforms off duty, which is a rule that usually applies to reservists. However, such expenses must be reduced by the amount of any uniform allowance or reimbursement.
- Costs incurred Transitioning Back Into Civilian Life
Qualified expenses in transitioning back to civilian life may be deductible like some of the costs incurred seeking a new civilian job. These may include travel expenses, resume preparation fees, and outplacement agency fees.
If you are a member of the U.S. Armed Forces and have a question about any military-related tax credits, incentives, extensions or other considerations regarding the filing and payment of your taxes, you should contact the your experienced and reliable tax attorneys at the Thorgood Law Firm www.thorgoodlaw.com . For a FREE consultation call 212-490-0704.
