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.
States Offer Tax Breaks
Some states either don’t tax military income or exempt part of it. Arkansas, Kentucky Minnesota, New Mexico and Oklahoma are among the states in 2014 offering exemptions, though the way the exemptions are applied vary.
Other states have rules that pertain to where a state resident earned military pay. Pennsylvania, for instance, taxes military personnel who are state residents and earn active duty income in-state, but don’t tax active duty pay earned by state residents while they are out of state. The state doesn’t collect state income tax from non-resident active duty military personnel who are temporarily stationed in the state.
Some states exempt the pay military receive serving in combat zones, others restrict exemptions to active-duty personnel while others exempt reservists and national guardsmen. You should contact your state department of revenue to learn what rules apply. Most states have income taxes, but each state has its own tax laws, which are always changing.
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 federal income tax return:
- 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
Armed forces members don’t pay federal income tax on earnings from service in designated combat zones.
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 October 2018, the designated combat zones were Arabian Peninsula area, the Sinai Peninsula, the Kosovo area, and Afghanistan area. Combat zones are designated by Executive Order and can change depending on activity. The countries and places qualified as direct support for combat zones include Jordon, Kyrgyzstan, the Philippines, Djibouti, Yemen, Somalia, Syria, The Federal Republic of Yugoslavia, Albania, Kosovo, Kuwait, Saudi Arabia, Oman Bahrain, Qatar and the United Arab Emirates.
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, part of the Arabian Sea and Gulf of Aden.
Filing Taxes for Military
The federal government would like taxes paid by everyone — including members of the armed forces — by Tax Day in mid-April, but service members have certain privileges that allow them to extend that deadline without penalties.
For example, members of the military stationed 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)
Military service members who participate in the military Thrift Savings Plan (TSP) can make contributions to traditional and Roth IRAs.
Members can make traditional tax-exempt contributions to their TSP just as civilian workforce can deposit money in IRAs or have it withheld in 401(k)s. Money deposited as tax-exempt in a TSP grows untaxed until it is withdrawn at retirement age. The invested money grows tax-free, often for decades, but it taxed as regular income when it is eventually withdrawn. Since TSP deposits are pretax investments, they lower taxable income in the year the funds are invested,
The second sort of Thrift Savings Plan is a Roth IRA, but with an extra advantage for those serving in combat zones: Since military personnel serving in these areas don’t tax on income earned while there, they can they can deposit earnings in a TSP Roth tax free. That’s an advantage, since taxes must be paid first on money invested in civilian Roths. Like non-military Roths, these accounts grow tax free and no tax is charged on withdrawals if they are made in accordance with tax rules,
Both traditional and Roth TSP funds are treated like money in other IRAs. If you withdraw money before you reach 59 ½, it is considered a loan and must be repaid or tax penalties are imposed. You can also roll over TSP money into non-military IRAs. The rules for withdrawals, rollovers and distributions are complicated, so you should carefully read IRS documents or consult a tax professional if you are uncertain about how to proceed.
Veterans Tax Help
The IRS and the Department of Veterans Affairs jointly offer free tax preparation assistance to military veterans. In addition, the Military OneSource Resources for Transitioning Service Members and Families provides free resources including access to MilTax, online software that can be used to file a federal and as many as three state tax returns. The service is available for 365 days after separation or retirement from the military.
The IRS also offers tax refunds to certain disabled veterans.
Tax Breaks after Discharge
When members of the military are discharged, they can claim some deductible expenses as they transition to civilian life.
The costs for travel incurred while job hunting; costs for resume preparation and any job placement fees are all deductible expenses on your taxes.