Special tax relief acts, programs, and credits are available to military personnel. Learn what military income and benefits are excluded from taxable income and what tax credits military personnel can claim to reduce their tax liability and increase the size of their tax refund.
Introduction
Nobody likes to pay taxes, especially when their annual income is needed to support a family. However, if you are one of the thousands of men and women who serve their country in the military, there are several tax breaks and programs that can save you hundreds or even thousands of dollars in taxes each year. This article goes over the tax relief acts, tax exclusions, and credits that active military personnel can use on their individual income tax returns. While these tax tips will be helpful for active military members they may not be applicable to military pensions or veterans’ benefits. For tax help on these topics you will need to read IRS publication 525.
Tax Acts and Programs That Apply to Active Military Personnel
Servicemembers’ Civil Relief Act
This act has several benefits. The first tax related benefit of this act is that it eliminates state income taxes for nonresidential servicemen and women. If the only reason the person is working in the state is because of their military active duty then the state is not allowed to assess state income tax on their wages. States are also prohibited from increasing the servicemember’s spouse’s state tax liability by including the servicemember’s income in the calculation of the couple’s state tax liability.
Another tax benefit of this act is that, as an active duty military member you can use this act to delay paying your income taxes that are due before or during your active duty for up to 180 days after your termination of duty. For more information on how to use this benefit for deferring tax liability payment please refer to IRS publication entitled Armed Forces Tax Guide.
Death Gratuity
If you are the survivor of a member of the military that died as a result of their active duty, then you will be entitled to the military’s Death Gratuity in the amount of $12,000. In the past only a portion of this amount was not taxable, however, as of September 10, 2001 the full amount of this gratuity has been reclassified as completely non-taxable. If you paid taxes on a Death Gratuity for a death of a servicemember after September 10, 2001, you may be able to request a refund. To do this you will probably need to file an amended tax return.
Reserve Component Travel Expenses
As a reservist you are allowed to deduct your travel expenses that are caused by fulfilling your military responsibilities as long as your duty requires you to travel more than 100 miles away from your primary home of residency. To claim this deduction you will enter your travel expense amount on your Form 1040, on line 24, and not on your Schedule A as a miscellaneous deduction.
Third Party Designee
If you are serving overseas, then you may also want to check the Yes box on your tax return to ensure that the IRS can talk to a third party that you designate about your tax return. This will allow your selected agent to represent your interests in regards to your tax return and to answer any questions that they have regarding your return while you are out of the country, or on active duty.
Military Tax Exclusions
In addition to having several tax acts and programs that give people in the military a little bit of tax relief, there are also many types of military pay and benefits that are excluded from their taxable income. Living allowances such as Basic Allowance for Housing is not taxable, and you can still deduct your mortgage interest and real estate taxes on your 1040 even if you use your BAH to pay them. Basic Allowance for Subsistence, housing and cost-of-living allowances, and Overseas Housing Allowance benefits are also not taxable.
Moving allowances such as dislocation, military base realignment and closure benefit paid after November 11, 2003, move-in housing, moving household and personal items, moving trailers or mobile homes, storage, temporary lodging and other related expenses that are paid as a military benefit are also not included in your taxable income, nor are travel allowance, family allowances, or death allowances.
Combat zone pay is generally not taxable unless you are an officer. In that case, there are limits to the maximum amount of combat zone pay that can be excluded from your taxable income.
Other payments like defense counseling, disability, group-term life insurance, professional education, ROTC educational and subsistence allowance, survivor and retirement protection plan premiums, uniform allowances, and uniforms furnished to enlisted personnel are all non-taxable military payments. Finally, in addition to all of the above non-taxable benefits and payments, any and all dependent care assistance, legal assistance, medical and dental care, commissary/exchange discounts, and space-available travel on government aircraft paid for by the military in the name of the military member are also not taxable, and are excluded from your W-2 tax form income statement.
Tax Credits
Earned Income Credit
The first tax credit that you may qualify for is the Earned Income Credit. If you have one or more children you will need to (1) have earned some kind of income within the tax year, (2) have earned $34,458 ($35,458 if married and filing jointly) or less if you have more than one child, or $30,338 ($31,338 for married couple) if you have one child, (3) you cannot be filing as married filing separately, (4) neither you or your spouse can be a qualifying child of someone else, (5) only one person can claim each child, (6) you can’t be also filing a Form 2555, Foreign Earned Income, or IRS Form 2555-EZ, Foreign Earned Income Exclusion, (7) you have to be a U.S. citizen or a residential alien, (8) have investment income less than $2,650 for the year, and (9) you, your spouse, and each qualifying child must have a valid social security number in order to qualify for the Earned Income Credit.
If you don’t have a qualifying child you can still qualify for the Earned Income Credit as long as: (1) your income is less than $11,490, (2) you have earned income to report, (3) you are not filing as married filing separately, (4) you are not the qualifying child of another person, (5) you are between the ages of 25 and 65 at the end of the tax year, (6) you are not another person’s dependent, (7) you lived in the United States at least 50% of the tax year (see exception note), (8) you are not filing a form 2555 or a Form 2555-EZ, (9) you are a U.S. resident or resident alien, (10) you have investment income that is less than $2,650, and (11) you must have a valid social security number.
(Exception note for #7 above – Military personnel that are on active duty and stationed overseas are still considered to have lived in the U.S. during the year and therefore satisfy the EIC qualification requirement #7.).
The EIC credit can help you get a larger tax return when you file by giving a tax credit between $2 and $4,300 depending on your annual income and the number of children that you have, or you can file form W-5 with your employer and get an Advance Earned Income Credit added to your monthly payroll check. To qualify for AEIC you have to (1) expect to qualify for EIC at the end of the tax year, (2) file form W-5 with only one employer, (3) have a qualifying child, and (4) you must meet all of the requirements set out in the W-5 form instructions. Once you qualified you will receive a portion of your annual EIC added to your paycheck (not taxable and not considered income). The amount added to each paycheck will be based on a formula, which takes into consideration how much money you earned during the pay period and your filing status.
Child Tax Credit
Another tax credit that can help reduce your tax liability is the Child Tax Credit. To qualify for the Child Tax Credit your qualifying child has to: (1) be under the age of 17 by the end of the tax year, (2) be a citizen of the United States, (3) be claimed as your dependent, and (4) be related to you or under your guardianship. This credit can be as much as $1,000 and can greatly help reduce your tax liability.
If you had the amount of the Child Tax Credit that you can claim reduced for some reason you may be able to recover a larger credit by claiming the Additional Child Tax Credit. If you qualify for this credit you may receive a refund even if you have $0 tax liability. Again it pays to at least look into these credits to see if you qualify as they may help to generate a larger refund check for you.