Military service members take many sacrifices and have special obligations in order to serve their country; naturally, their taxes are affected. There are a number of special tax breaks they are entitled to and this post will be to inform our service members of what exactly they entail.
Residence or Domicile: Because there are times when a military service member has orders to leave their residence for a number of months, they will not lose or acquire a residence or domicile for tax purposes due to being absent in any tax jurisdiction in the U.S. For example, a member of the military who currently resides in Arizona but is assigned under military orders to a duty station in California, will continue to be treated as an Arizona resident and is not subject to California state income tax.
The same rule would apply to the military spouse, so long as the couple relocated due to military orders and they do share the same domicile.
Moving expenses: If you are an active duty member of the Armed Forces and are required to move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving themselves and a member of the household. This rule says that if there are superlative expenses that the military stipend did not cover, you can deduct such expenses from your taxes. Some of these expenses might include: shipping, a moving van, truck rental, travel expenses (not including meals), insurance and storage en route, moving pets, and utility connect/disconnect charges. Military personnel are not subject to the 50-mile distance test or 39-week employment test that civilians are subject to for claiming a moving expense deduction.
Combat Pay Exclusion: If a member of the Armed Forces services in a combat zone as an enlisted person or as a warrant officer for any part of a month, every bit of military pay received for that month is NOT taxed. For officers, the monthly exclusion is capped at the highest enlisted pay plus any hostile fire or imminent danger pay received.
Living Allowances: In addition to combat pay not being taxed, the basic housing allowance and both housing and cost-of-living allowances abroad (paid by a foreign Gov’t or U.S. Gov’t) is also excluded from taxation.
Home Mortgage Interest and Taxes: A military taxpayer can deduct mortgage interest and real estate taxes on his or her tax return as an itemized deduction, even if they are paid with nontaxable military housing allowance pay.
Home Sale Gain Exclusion: To claim the $250,000 (or $500,000 for qualified married taxpayers) home gain exclusion, a civilian would have to own and use the home for two of the five years immediately before the home’s sale but being in the military allows you to suspend the five-year look back period for up to ten years when on qualified official extended duty.
A military taxpayer who sells his or her primary residence and does not meet the 2- of-5-years ownership and use tests due to a move to a new permanent duty station may qualify for a reduced maximum exclusion amount.
Reservist Travel Expenses: Reservists who travel more than 100 miles away from home or need to stay overnight somewhere in the process of travel, can deduct travel expenses as an adjustment to their gross income. This deduction can be taken even if the reservist does not itemize his or her deductions.
Reservist Early Withdrawal Exception: Qualified reservists are allowed penalty-free withdrawal from IRAs, 401(k)s etc if ordered or called to active duty for a period lasting longer than 179 days and if the distribution is taken during the active duty period.
Extension of Deadlines: Because military personnel can be away on orders during certain tax deadlines, such deadlines can be postponed. These deadlines include: filing tax returns, paying taxes, filing claims for refund and taking other actions with the IRS.
Uniform Cost and Upkeep: Similar to writing off moving expenses, you can also write off uniform upkeep if it surpasses the allotted amount of money given by the military. It is important to note that this can only be used if the uniform cannot be worn when off duty.
Joint Returns: If one spouse is away on military orders, a power of attorney may be used when filing a joint return so that only one spouse needs to sign. Normally, both spouses would need to sign the return.
Tax Forgiveness: If a military member loses their life in a combat zone or as a result of a terrorist action, their income taxes are forgiven for the year of their death and for any prior year that ends on or after the first day of service in a combat zone.
ROTC Students: While active duty pay, such as pay during summer advanced camp is taxable, subsistence allowances paid to ROTC students participating in advanced training are not taxable.
Transitioning Back to Civilian Life: You may be able to deduct costs acquired from the process of looking for a new job. These expenses might include: travel, resume preparation, and outplacement agency fees. In addition to this, moving expenses may be deductible if the move is closely related to starting work at a new job location.
If anything discussed above brings question to mind for you or your spouse, or there is anything we can do to make life easier for you, feel free to contact our office with questions. We thank you for your service in our Armed Forces.