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6 Money-Saving Tax Moves for Service Members

Jan 09, 2019 | 5 min read | Ben Gran

Key Takeaways

  • Service members can take advantage of several money-saving tax benefits.
  • Be sure to get credit for any combat pay exclusion and other deductions.
  • Tax help is available from the VITA program at military bases and overseas.

 

Military service members and their families often have unique tax situations that require special planning. Especially if you have been deployed to a combat zone, if you have moved to a new location due to a permanent change of station, or if you have received extra compensation such as incentive pay or bonus pay, you might have questions about how to account for various items on your tax return.

 

 

To save money, maximize your deductions, and have an overall easier time with preparing your federal tax returns, here are six military-related tax considerations for 2018 (taxes due on April 15, 2019):


1. Know your eligibility

Military service members qualify for certain tax benefits, deductions, and other advantageous tax treatment for certain life changes and financial situations that go with being a member of the U.S. Armed Forces. If you are a member (commissioned officer, warrant officer, or enlisted personnel) of any of the five-armed service military branches, or the National Guard and reserves, you can qualify for military tax benefits.

Other people who are not members of the military, but who are members of uniformed service organizations, may be eligible for military tax benefits. Members of support organizations who work in a combat zone such as contractors, civilian employees, Red Cross members, or accredited news media personnel may be eligible for a tax extension.


2. Qualify for combat-related tax benefits

If you have been deployed to a combat zone, you can claim certain combat zone tax benefits. The current IRS-recognized combat zones include:

  • Afghanistan and other countries certified for combat zone benefits due to their direct support of military operations in Afghanistan, including Djibouti, Jordan, Kyrgyzstan, Pakistan, Somalia, Syria, Tajikistan, Uzbekistan, and Yemen
  • Arabian Peninsula Area: Includes the total land areas of Bahrain, Iraq, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, along with the Gulf of Aden, the Gulf of Oman, the Persian Gulf, the Red Sea, and part of the Arabian Sea.
  • Kosovo Area: Includes Albania, Kosovo, Serbia/Montenegro, the Adriatic Sea, and part of the Lonian Sea
  • Sinai Peninsula: This is a new qualifying combat zone that was added as part of the Tax Cuts and Jobs Act (TCJA) enacted in December 2017.

In order to qualify for combat-related tax benefits, military service members must also meet one of the following three options as outlined by the IRS, depending on the circumstances of your service and special pay:

  • Option 1: Service in an active combat area as designated by Executive Order,
  • Option 2: Service in a support area as designated by the Department of Defense in direct sustainment of military operations in the combat zone
  • Option 3: Service in a statutorily designated Qualified Hazardous Duty Area


In addition, to qualify for this tax benefit, service members must receive special pay for duty subject to hostile fire or imminent danger as certified by the Department of Defense.

Military members in a combat zone can qualify for a deadline extension on filing and paying their taxes, according to the IRS. The deadline is extended for the period of service in a combat zone, plus 180 days after the last day in the combat zone. In case you are going through an IRS audit, enforced collection of back taxes, or other compliance actions, you can contact the IRS and have these actions suspended until 180 days after you have returned from the combat zone.

 

3. Remember your combat pay exclusion

Enlisted members, warrant officers, and commissioned warrant officers have all of their combat pay excluded from their taxable income. This means that you won't owe taxes on income earned while in a qualifying combat zone. Commissioned officers have a limit on how much combat pay they can exclude from taxable income – as of 2017, the applicable amount was $8,3910.10 per month. For updates for 2018, refer to IRS Publication 3, the Armed Forces' Tax Guide.

You typically don't need to report your combat pay on your taxes, as it should be automatically reflected on your wages in Box 1 of your Form W-2. However, be sure to check your W-2 to make sure it accurately shows your wages, excluding any combat pay. If there is an error or discrepancy, ask your finance office to help you get a corrected Form W-2.


4. Deduct qualifying moving expenses

Civilian taxpayers are no longer allowed to deduct moving expenses on their taxes – that deduction was eliminated by the new tax law enacted in December 2017. However, military service members can still deduct qualifying moving expenses related to a permanent change of station move, as long as those expenses were not reimbursed by an allowance. For more details on how to deduct your moving expenses, refer to IRS Form 3903 (recently updated for 2018).


5. Maximize your family tax benefits

Military service members and their dependents can claim a variety of military family tax benefits, which include:

  • Department of Defense Homeowners Assistance Program payments can be excluded from income as a fringe benefit.
  • Military personnel dependent care assistance programs are not included in the service member's income – these are excludable benefits.
  • You might be able to avoid owing taxes on gains from the sale of your home. The IRS allows military service members to have the five-year test period for ownership and use suspended during any timeframe that you or your spouse are serving on qualified official extended duty. This means even if you do not reside in your home (due to deployments, etc.) for the required two years out of the previous five years, you can still sell your home and not have to pay taxes on the gains (up to the limits on excludable gains, which as of 2017 were $250,000 for single filers or $500,000 for married filing jointly). More details are available in IRS Publication 3.

Not all members of the military utilize or qualify for these programs and benefits, but if you do, make sure to claim any deductions that you qualify for, as this can reduce your taxable income and save you money at tax time.

 

6. Get free tax help

Military service members can get free help with their tax returns from the Volunteer Income Tax Assistance (VITA) program. VITA sites are available at military bases and overseas. Whether you need help filing your tax return, want to get an extension to file your taxes, have questions about your allowable deductions and tax benefits, or need a professional to take a second look at your tax return, these volunteers are trained to understand and help with the unique tax needs of the military community. Find a Volunteer Income Tax Assistance site near you.

 

 

What you can do next

Before filing your taxes by the April 15 deadline, make sure you include all of your military tax benefits and eligible deductions. Get free tax help from the VITA program and ask for an extension if needed.

 

Ben Gran is a freelance writer based in Des Moines, Iowa. He writes about personal finance, financial services, technology, and business.

 

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