Tax season among members of the military is much like tax season among civilians: stressful.
Just like for civilians, members of the armed forces must pay federal taxes, wade through a set of rules and conditions that nobody really understands or can explain, and experience the frustration, panic and dread as the tax deadline approaches.
The Internal Revenue Service (IRS) tries to minimize the difficulties for active duty personnel, but the many types of pay and allowances that exist in the military — and the fact that some of their pay is taxable and other pay is not — make it a long, arduous process.
The good news is that some online tax preparation services and national tax companies offer assistance in preparing taxes, either free or for significantly reduced charges. Most military base installations also have volunteers who will sit with service members or their spouses and help them with the compiling and filing of their federal and state income tax.
Tax Tips for Military Incomes
There are a lot of ways for service members to lighten their tax load, some more relevant and rewarding than others.
Here are a few tax tips that every service member should be aware of before filing:
- Combat Pay vs. Regular Pay – Income earned while serving in a combat zone or direct support of operations in a combat zone is excluded from income taxes. Any bonuses (such as re-enlistment) earned while in a combat zone also are excluded from taxes.
- Earned Income Tax Credit – In the 2015 tax year, you could receive a tax credit between $3,359 and $6,242, depending on how many children you have and how much income you earned.
- Moving and Travel Expenses – Members of the armed forces who are permanently reassigned to another base may deduct unreimbursed moving expenses. Likewise, Reserves who must travel more than 100 miles in connection with their service can deduct unreimbursed travel expenses.
- Death Benefits Not Taxable – If a service member is killed on active duty and the family receives a $100,000 gratuity from the government, that money is tax free.
- Forgiveness of Tax Liability – If a service member dies in a combat zone or in support of combat operations, their tax liability for that year is forgiven. If they already paid their taxes, the amount will be refunded to survivors.
- Military Spouse Residency Relief – A law passed in 2009 allows married service members to claim either the state they are legal residents of or the state they were assigned to by military orders. This could mean a choice of paying state taxes or not paying state taxes.
What Military Income Is Taxable?
The rules and conditions that determine what is taxable income for members of the armed forces are endless and often confusing. No general rule applies other than to say combat pay can’t be taxed, but just about any other kind of pay can.
The following items are counted under gross income and must be reported as such on a taxpayer’s 1040, 1040A or 1040EZ tax form:
- Basic pay
- Diving pay
- Proficiency pay
- Foreign duty pay
- Responsibility pay
- Continuation pay
- Enlistment bonus
- Re-enlistment bonus
- Separation pay
- Sea duty pay
- Imminent danger pay
- Hostile fire pay
- Flight duty pay
- Medical/Dental officer pay
- Aviation career incentive pay
- Veterinary officer pay
- Nuclear qualified officer pay
- Personal money allowance
- Overseas extension bonus
- Accrued leave payment
- Armed forces health profession scholarships
The following military benefits do not have to be reported as income:
- Basic allowance for housing
- Other quarters allowances
- Overseas housing allowance
- Basic allowance for subsistence
- ROTC educational and subsistence allowances
- Moving storage
- Dislocation allowances
- Trailer allowances
- Family allowances
- Defense counseling
- Uniforms (in kind or allowances)
- Professional education
- Interment allowance
- Death allowance
- Evacuation allowance
- Group term life insurance
- Veterans’ benefits
- Congressional Medal of Honor pension
- Medical benefits
- Survivor and retirement protection
- Plan premiums deducted from military pay
Combat Zone Pay and What Can Be Excluded
Members of the armed forces do not have to pay taxes on income received while they are on duty in an area designated as a combat zone.
Enlisted members, warrant officers or commissioned warrant officers who serve any portion of a month in a combat zone have all their pay for that month excluded. If you are hospitalized because of injuries suffered in a combat zone, your pay also is excluded from taxes, even if the hospital is not in a combat zone.
If you are a commissioned officer, your pay in a combat zone is excluded from taxes, but the amount is limited to the highest rate of enlisted pay for a month.
As of February 2016, the designated combat zones were Arabian Peninsula areas, the Kosovo area, and Afghanistan. Combat zones are designated by Executive Order and can change depending on activity. The countries qualified as direct support for combat zones include Turkey, Egypt, Saudi Arabia, Jordan, Kuwait, Qatar, Pakistan, Israel, the Philippines, United Arab Emirates, and Somalia.
The same is true for members of the Navy on board ships in parts of the Mediterranean, Adriatic, Red, and Ionian Seas as well as the Persian Gulf, Gulf of Oman, and Gulf of Aden.
Filing Taxes for Military
The federal government would like taxes paid by everyone — including members of the armed forces — by April 15, but service members have certain privileges that allow them to extend that deadline without penalties.
For example, members of the military serving overseas during tax filing season are automatically granted a two-month extension to pay their taxes, without incurring penalties or interest.
Service members who have recently served in a combat zone have an additional 180 days after they return home — plus the equivalent amount of time served in the combat zone — before filing. An extension of up to five years is also granted for any time spent hospitalized due to injuries sustained in a combat zone.
The Soldiers and Sailors Relief Act provides a similar 180-day deferral to Army Reserve and National Guard soldiers called to active duty. They must show that their ability to pay taxes was impaired due to their military service. The benefit also accrues to new recruits, but it is not automatic and must be requested.
The extensions apply to any and all of the following:
- Filing any return of income tax, estate tax, gift tax, employment tax or excise tax
- Paying any income tax, estate tax, gift tax, employment tax or excise tax
- Collection by the IRS of any tax due
- Filing a petition with the Tax Court for redetermination of a deficiency, or for review of a Tax Court decision
- Filing a claim for credit or refund of any tax
- Bringing suit for any claim for credit or refund
- Making a qualified retirement contribution to an IRA
- Allowing a credit or refund of any tax by the IRS
- Assessment of any tax by the IRS
- Giving or making any notice or demand by the IRS for the payment of any tax, or for any liability for any tax
- Bringing suit by the United States for any tax due
There are available provisions and money for military members. But since IRS guidelines change continually, it is imperative that each service member seek the financial advice of knowledgeable tax experts.
Other benefits include the following:
- Service members on extended duty may request automatic withholding of their federal taxes
- A spouse can file tax returns on behalf of a deployed service member
Tax law makes it easier for certain service members to qualify for the Earned Income Tax Credit (EITC)