It’s almost Veteran’s Day so let’s discuss some of the tax benefits for the U.S. military forces. Some types of pay are not taxable. And special rules may apply to some tax deductions, credits and deadlines. These rules apply to all branches of U.S. Armed Forces; whether they are National Guard, Reserves, or Active Duty:
- Filing tax returns late – Service members have up to the later of 180 days after returning from a combat zone deployment, or combat related hospital stay, to file tax returns without late penalties or interest. Military members have until June 15th to file returns if they are overseas and not in a combat zone.
- Combat Pay Exclusion. If you serve in a combat zone, certain combat pay is not taxable. You won’t need to show the pay on your tax return because combat pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Service in support of a combat zone may qualify for this exclusion.
- Qualified Reservist Distributions and Repayments. Reservists who are called into active service, may be able to take distributions from retirement accounts (IRA, 401K, TSP, etc.) without penalty and may also repay any distributions taken even if the repayment exceeds the annual IRA contribution limit. This is like borrowing from a 401K and paying it back. Certain conditions apply, ask your tax professional.
- Selling a Home for tax purposes and getting the Capital Gain Exclusion – Time deployed counts for the five-year living at the same address rule, to help sell the home and avoid Capital Gains. You must live in your home 2 of 5 years to get Capital Gains Exclusion.
- Overnight Travel Expenses for National Guard and Reserve members living more than 100 miles from duty station – This deduction is on the front of the tax return, and no itemizing is required. This allows you to write off travel, lodging, and meal expenses.
- Deductions for Uniforms, Equipment and Laundry – You can write off uniforms you purchase, or any repairs made to them, as well as the cost of laundering the uniforms, plus any military equipment you purchase for your use. There are special rules that allow military personnel to even deduct the cost for laundry and haircuts, if away from home for less than one year on temporary duty.
- Some states offer little or no state tax on military members and spouses earnings –Arizona and many other states have no tax on military pay, and no tax on the spouse’s earnings either. You can claim residence in any state if you are on active duty in the military. For instance, you can be stationed in Ft. Huachuca, Arizona and still claim a Nevada residency. This means you would not have to prepare an Arizona tax return, if you are active military. This would allow you to not pay state taxes to the State of Arizona even while you are stationed and living in Arizona. This also counts for vehicle registration tax. Be sure to check on the laws of the state you are living in for your situation. Better yet, contact a tax professional for advice.
- Military allowances are tax-free. Some examples of allowances would be Clothing Allowance, Family Separation Allowance, Base Housing Allowance, Per Diem Allowance, and Temporary Duty Allowance. These are all monies that are given to you in addition to your regular payroll that is not subject to tax.
- Forgiveness of tax upon Death. Current year, previous year and unpaid taxes are forgiven and/or refunded when military members die, if they are active duty during either a terrorist event, in a combat zone, or in support of a military combat action.
- Earned Income Tax Credit. If you get nontaxable combat pay, you may choose to include it to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay stays nontaxable.
- Signing Joint Returns. Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse, by attaching a copy of the military combat orders. In other cases when your spouse is absent, you may need an IRS power of attorney to file a joint return.
- Civilian Life Transfer. If you consider leaving the military and look for work, you may be able to deduct some job-hunting expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction. This is not allowed after 2017.
- Moving Expenses. Members of the military still get to take a deduction for the out of pocket costs of moving your household goods and your family.
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