August 20, 2013
Tax Benefits for Military Personnel
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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
If you're a member of the U.S. Armed Forces, there are many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return. Here are some of the more prominent of those benefits:
Combat Pay Exclusion - If you are an enlisted member of the military serving in a combat zone you can exclude from taxation your pay for any month (one day of a month counts as a full month) you serve in a combat zone. An officer's exclusion is limited to the highest rate for enlisted personnel. This exclusion is automatically computed by the military and the excludable amounts will not appear on your W-2 form. If you qualify for an Earned Income Tax Credit (EITC) you may elect to include or not include the excluded combat pay in the EITC computation, thus allowing you the benefit of maximizing the credit with or without the exclusion while the excluded income remains tax free.
Moving Expenses - To deduct moving expenses, a military taxpayer usually must meet the general time and distance tests that apply to all taxpayers. However, if you are on active duty and move because of a permanent change of station, you do not need to meet those tests. A permanent change of station includes: a move from the military member's home to his or her first post of active duty, a move from one permanent post of duty to another, and a move from the last post of duty to the member's home or to a nearer point in the United States. The move must generally occur within one year of ending active duty service.
Reservists' Travel Deduction - If you are an Armed Forces reservist who travels more than 100 miles away from home and stays overnight in connection with service as a member of a reserve component, you can deduct travel expenses as an adjustment to gross income. This is in lieu of deducting those expenses as a miscellaneous itemized deduction (subject to the 2% of AGI limitation). Thus, you can take this deduction even if you do not itemize your deductions. The deduction includes unreimbursed expenses for transportation, meals (subject to the 50% limit), and lodging, but the deduction is limited to the amount the federal government pays its employees for travel expenses.
Combat Zone and Qualified Hazardous Duty Area Extensions - For military taxpayers in a combat zone or qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. The extension is for 180 consecutive days after the last day the military taxpayer was in a combat zone or qualified hazardous duty area or the last day of any continuous qualified hospitalization for injury from service in the combat zone or qualified hazardous duty area. In addition, the 180 days is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone or qualified hazardous duty area.
Extension To Pay Tax When Not In a Combat Zone - A member of the Armed Forces may delay payment of income tax (but not the employee's share of Social Security and Medicare taxes) that becomes due before or during military service. To qualify, the service member must be performing “military service” AND notify the IRS in writing that his or her ability to pay the income tax is materially affected by the military service.
If the IRS approves the request, the service member will be allowed up to 180 days after termination or release from military service to pay the tax. If the tax is paid in full by the end of the deferral period, no interest or penalty will be charged for that period.
Home Mortgage Interest & Taxes - You can deduct qualified mortgage interest and real estate taxes as an itemized deduction, even if they are paid with nontaxable military housing allowance pay. The home mortgage interest is, however, still subject to the general rules for deducting home mortgage interest.
Home Sale Gain Exclusion - Taxpayers are allowed to exclude $250,000 ($500,000 if filing a joint return with a spouse and both qualify) of gain from a home sale if it was owned and used as a principal residence for two of the five years prior to the sale. The following special rules apply to military personnel:
Signing Joint Returns - Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duties or conditions, the other may, in some cases, sign for both spouses, or will need a power of attorney to file a joint return.
If you have questions related to these and other benefits provided to members of the military, please give this office a call.
Combat Pay Exclusion - If you are an enlisted member of the military serving in a combat zone you can exclude from taxation your pay for any month (one day of a month counts as a full month) you serve in a combat zone. An officer's exclusion is limited to the highest rate for enlisted personnel. This exclusion is automatically computed by the military and the excludable amounts will not appear on your W-2 form. If you qualify for an Earned Income Tax Credit (EITC) you may elect to include or not include the excluded combat pay in the EITC computation, thus allowing you the benefit of maximizing the credit with or without the exclusion while the excluded income remains tax free.
Moving Expenses - To deduct moving expenses, a military taxpayer usually must meet the general time and distance tests that apply to all taxpayers. However, if you are on active duty and move because of a permanent change of station, you do not need to meet those tests. A permanent change of station includes: a move from the military member's home to his or her first post of active duty, a move from one permanent post of duty to another, and a move from the last post of duty to the member's home or to a nearer point in the United States. The move must generally occur within one year of ending active duty service.
Reservists' Travel Deduction - If you are an Armed Forces reservist who travels more than 100 miles away from home and stays overnight in connection with service as a member of a reserve component, you can deduct travel expenses as an adjustment to gross income. This is in lieu of deducting those expenses as a miscellaneous itemized deduction (subject to the 2% of AGI limitation). Thus, you can take this deduction even if you do not itemize your deductions. The deduction includes unreimbursed expenses for transportation, meals (subject to the 50% limit), and lodging, but the deduction is limited to the amount the federal government pays its employees for travel expenses.
Combat Zone and Qualified Hazardous Duty Area Extensions - For military taxpayers in a combat zone or qualified hazardous duty area, the deadlines for taking actions with the IRS are extended. The extension is for 180 consecutive days after the last day the military taxpayer was in a combat zone or qualified hazardous duty area or the last day of any continuous qualified hospitalization for injury from service in the combat zone or qualified hazardous duty area. In addition, the 180 days is also extended by the number of days that were left for the individual to take an action with the IRS when they entered a combat zone or qualified hazardous duty area.
Extension To Pay Tax When Not In a Combat Zone - A member of the Armed Forces may delay payment of income tax (but not the employee's share of Social Security and Medicare taxes) that becomes due before or during military service. To qualify, the service member must be performing “military service” AND notify the IRS in writing that his or her ability to pay the income tax is materially affected by the military service.
If the IRS approves the request, the service member will be allowed up to 180 days after termination or release from military service to pay the tax. If the tax is paid in full by the end of the deferral period, no interest or penalty will be charged for that period.
Home Mortgage Interest & Taxes - You can deduct qualified mortgage interest and real estate taxes as an itemized deduction, even if they are paid with nontaxable military housing allowance pay. The home mortgage interest is, however, still subject to the general rules for deducting home mortgage interest.
Home Sale Gain Exclusion - Taxpayers are allowed to exclude $250,000 ($500,000 if filing a joint return with a spouse and both qualify) of gain from a home sale if it was owned and used as a principal residence for two of the five years prior to the sale. The following special rules apply to military personnel:
- Reduced exclusion - If you sell your primary residence and do not meet the two-out-of-five-years ownership and use tests due to a move to a new permanent duty station, you may qualify for a reduced maximum exclusion amount.
- Extended test period - You may choose to suspend the 5-year test period for ownership and use during any period you serve on qualified official extended duty. The period of suspension cannot last more than 10 years and cannot be suspended for more than one property at a time.
Signing Joint Returns - Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duties or conditions, the other may, in some cases, sign for both spouses, or will need a power of attorney to file a joint return.
If you have questions related to these and other benefits provided to members of the military, please give this office a call.
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