Five Tax Advantage Opportunities for the Military
There are five important ways that active duty military can save on income taxes. This blog post discusses these critical opportunities for tax savings.
The exclusion from tax of certain military income from gross income is the most important to consider. Most income is taxable, but there are exceptions for those in the active-duty military. The IRS has a nice chart that shows what is included in income and what is not. Examples of excludible income are combat zone pay, family allowances, travel allowances, living allowances, death allowances, and moving allowances.
Combat Zone and Veterans Benefits
Wages earned by the active-duty military are usually taxable. But there is an exception for military personnel in combat zones, in which they get combat pay that is not taxable. For instance, if you serve in a combat zone for part of a month, you can exclude your pay from tax. But for officers, the payment is only excluded up to a certain amount.
In addition, veterans’ benefits paid by the Department of Veterans Affairs to veterans and their families are not taxable if used for education (GI Bill), training, disability compensation, work therapy, dependent care assistance, or other benefits related to a disability.
A U.S. taxpayer serving in a combat zone is granted an automatic extension, given extra time to file his tax return, pay taxes, and file a claim for a refund. The 180-day extension also applies to other service members performing active duty services supporting combat zone operations. In addition, a taxpayer serving in a combat zone qualifies for relief from IRS compliance actions, such as audits or collections, until 180 days after they have left the combat zone.
Sale of a Home
Military members can have the normal five years suspended for up to 10 years for a principal residence and potentially not have to recognize any tax gains on the sale. For example, if you are married and filing joint on your tax return, you can potentially exclude $500,000 of gains on your principal residence on its sale. The normal period is five years; you must have lived in the home 2 of 5 years. This acknowledges that the active-duty military moves around to different assignments and stations.
Most taxpayers cannot take a deduction for moving expenses, but active duty military can. This is according to a change of permanent station. An employee of the armed forces can move a spouse, dependents, household goods, and pets to a permanent change of station. This deduction cannot be taken in addition to what the military allows but can cover additional expenses of moving not covered. The moving expense deduction was eliminated under the Tax Cuts and Jobs Act, so only the military can take advantage of this.
Military reservists and National Guard members are entitled to a tax benefit for unreimbursed business expenses for drill mileage, lodging, meals, and other incidental costs. This tax break is only available for travel more than 100 miles from home to fulfill duties as a member of the National Guard and reserves.
These are five crucial tax advantage opportunities that active-duty military have to them. Contact me to learn more about how I can help with your finances.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.