How the Tax Code Adapts for Members of the Military

By Elizabeth Rosen

NEW YORK (IRS.com) — There are many challenges that come with serving in the military, but worrying about managing your taxes shouldn’t be one of them. Fortunately, there is tax help for military service personnel so you can work on developing a tax strategy that saves you time and money.

U.S. Armed Forces personnel and their families may face more tax-planning concerns than civilians because of frequent moves and the nature of their duties. To ease some of these burdens, the U.S. government has granted a number of special tax benefits to military personnel. If you are serving in the armed forces, consider taking full advantage of these tax breaks, especially the generous benefits available for those serving in combat zones.

If you are a member of the military on active duty and you have to move because of a permanent change of station, you may be able to deduct some of your moving expenses on your income tax return. The allowed deductible expenses include unreimbursed costs of moving, travel, storing and insuring household goods and personal items.

If you are a member of the armed forces and are selling your home, up to $250,000 (or $500,000 for married couples) of capital gains on the sale is tax free. Additionally, the usual requirement that a homeowner live in a personal residence for two of the past five years is extended to 10 years for active-duty service members.

Work-related travel expenses are generally deductible for military personnel if they are unreimbursed and are incurred while traveling away from home. If you are on a permanent duty assignment, it’s important to remember that your duty station is considered your home (regardless of where your spouse or children may live). Expenses for personal travel, such as visits to family while on leave, are not deductible. If you are a member of the U.S. Armed Forces Reserves, you are allowed to deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties. Note that it is not necessary to itemize these tax deductions because the eligible expenses are deducted as an adjustment to your income.

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There is special tax help for military personnel deployed in combat zones. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, none of the military pay you get for military service during that month is considered taxable income. Military pay earned while you are hospitalized as a result of wounds, disease or injury incurred in the combat zone may also be excluded from taxable income. You may, however, include your nontaxable combat pay in your “earned income” for the purposes of claiming the Earned Income Tax Credit. The monthly exclusion for officers serving in a combat zone is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. You may also be able to exclude a number of other items from your income for tax purposes, such as re-enlistment bonuses, pay for accrued leave and student loan repayments.

As a member of the military, your tax strategy can also include deductions for the cost and care of your uniform. The deductibility of uniform purchases and future upkeep depends on whether the uniform can be worn when off duty and whether your costs were reimbursed. If military regulations prohibit you from wearing certain uniforms when off duty, the cost and upkeep of those uniforms are tax deductible, minus any allowance or reimbursement you receive to cover these costs.

Military personnel are also eligible for special tax extensions. While the deadlines for filing tax returns, paying taxes and filing claims for tax refunds are generally the same for armed forces personnel as for civilians, they are automatically extended for certain qualifying service members. Military members serving in combat zones get a tax extension for the duration of their combat zone service, plus an automatic 180-day extension that begins after their last day in the combat zone. These extended deadlines apply for filing tax returns, paying taxes (excluding Medicare and Social Security taxes), filing tax refund claims, and making qualified contributions to an IRA.

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There is some tax help for members of the military who need to make a withdrawal from their retirement plan. Special rules may also apply to distributions from an IRA or a 401(k) plan that were made after the date of the order or call to active duty and before the close of the active duty period. These withdrawals may not be subject to the 10% penalty tax on early distributions. In addition, these distributions can be repaid to the plan within two years after active duty ends.

Survivors of armed forces personnel who die while on active duty get a $100,000 tax-free death gratuity from the federal government. If the death is service-related, the gratuity is also paid to survivors of retirees within 120 days of retirement. In addition, military service members who die while on duty in a combat zone or in support of a combat operation are forgiven any federal taxes they owe for the year of death, and in some cases, for previous years.

While joint income tax returns must typically be signed by both spouses, a power of attorney may be used when one spouse is unavailable due to military duty. To help military families file their taxes, military installations generally offer free tax preparation assistance during the tax filing season and throughout the year.

It is always recommended that you check the IRS rules that apply to your particular situation and consult with a tax professional before making any major financial decisions. There are many tax breaks available to military personnel which you can take advantage of. Developing a solid tax strategy will help you save time and money, and help avoid headaches.

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