Serving in the military is a selfless act that comes with many challenges and rewards. Fortunately, the U.S. tax code recognizes the unique circumstances of military service and offers a variety of tax benefits to active duty personnel, reservists, veterans, and their families. This guide will explore some of the most prominent tax benefits available to military members, helping you save money and navigate the tax filing process with ease.
State of Residence for Tax Purposes
Military service often involves frequent relocations. The Servicemembers Civil Relief Act protects your right to choose your home state as your residence for tax purposes, regardless of your duty station. This can be particularly advantageous if your home state has lower income taxes compared to the state where you’re stationed. The Veterans Benefits and Transaction Act of 2018 extended this benefit to spouses, allowing them to elect the same state of residence for tax purposes as their service member spouse. The Veterans Auto and Education Improvement Act of 2022 further expanded this benefit by giving service members and their spouses three options for residency:
- Legal residence of the service member
- Legal residence of the spouse
- Current permanent duty station
Non-Taxable Allowances
Military service comes with various allowances that are not taxed. These include:
- Living allowances: Basic allowance for housing (BAH), housing and cost-of-living allowances abroad, and overseas housing allowances.
- Family allowances: Educational expenses for dependents, emergency allowances, and allowances for separation from family.
- Death allowances: Burial services, death gratuity payments, and travel for dependents to burial sites.
- Moving allowances: Allowances for relocation, move-in housing, transporting household goods, storage, temporary lodging, and realignment and closure benefits.
- Travel allowances: Allowances for dependent student travel, leave travel, reassignment travel, and per diem allowances.
- State benefit payments: Bonuses paid by states to service members or their families for service in combat zones are generally excluded from income.
- Other payments: Defense counseling services, disability payments, group term life insurance premiums, uniform allowances, and uniforms for enlisted personnel.
In-Kind Military Benefits
In addition to non-taxable allowances, military service provides valuable in-kind benefits that are not taxed, such as:
- Legal assistance
- Space-available travel on government aircraft
- Medical and dental care
- Commissary and exchange store discounts
Combat Zone Tax Exclusion
Military personnel serving in combat zones can exclude a significant portion of their pay from income. This exclusion applies to:
- Active duty pay earned in combat zones
- Imminent danger/hostile fire pay
- Reenlistment bonuses
- Accrued leave pay
- Student loan repayments (for a full year of service)
- Awards for service-related achievements
Homeownership and Tax Benefits
Military homeowners can benefit from several tax breaks:
- Home Mortgage Interest Deduction: Even if you receive a non-taxable housing allowance, you can still deduct mortgage interest on your home as an itemized deduction.
- Home Property Tax Deduction: The deduction for property taxes is still available, subject to the annual limits.
- Home Sale Gain Exclusion: Military homeowners can suspend the usual residency requirement for the home sale gain exclusion. This allows you to qualify for the exclusion even if you haven’t lived in your home for the standard two-year period due to military service.
Moving Expenses Deduction
While the moving expense deduction is generally not allowed for most taxpayers, military service is an exception. If you’re required to move due to a permanent change of station (PCS) orders, you can deduct your moving expenses, though the deduction is limited to the actual cost minus any non-taxable moving allowance received.
Death Gratuity and Life Insurance
Military death gratuity payments and service members’ group life insurance proceeds are not taxed for eligible survivors. These amounts can also be rolled over to retirement accounts with more favorable tax treatment.
Tax Credits and Retirement Savings
- Child Credit: Excluded combat pay is considered earned income for purposes of the refundable portion of the child tax credit.
- Earned Income Tax Credit (EITC): You can elect to treat combat pay as earned income for the EITC, potentially increasing your credit amount.
- IRA Contributions: Combat pay, although excluded from taxable income, is considered earned income for IRA contribution purposes.
- Reservist Travel Expenses: Reservists traveling over 100 miles for service can deduct their travel expenses as an adjustment to gross income.
Other Military Tax Benefits
- Qualified Reservists Early Retirement Plan Withdrawals: Qualified reservists can make penalty-free withdrawals from retirement accounts like IRAs and 401(k)s if called to active duty for an extended period.
- Retired Military Disability Compensation: Disability compensation received from the Department of Veterans Affairs is not taxed.
- Extension of Deadlines: The IRS offers extensions for filing tax returns, paying taxes, and claiming refunds for qualifying members of the military.
- Joint Returns: In cases where a spouse is unavailable due to military service, a power of attorney can be used to file a joint tax return.
- Tax Forgiveness: Military personnel who lose their lives in combat zones or due to terrorist acts are automatically forgiven income taxes for the year of death and any prior year ending on or after their first day of service in a combat zone.
- ROTC Students: Subsistence allowances paid to ROTC students in advanced training are not taxable, while active duty pay received during summer training is considered taxable income.
Conclusion
The U.S. tax code acknowledges the unique sacrifices made by military personnel and their families. By understanding the available tax benefits, you can maximize your financial well-being and save money while serving your country. If you have any questions or require further guidance on these or other military tax issues, consulting with a tax professional familiar with military tax law is highly recommended.
