If you're serving in the armed forces, it's important to understand your military tax advantages so you can make the most of them when filing your tax return.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
The federal tax code has specific benefits for members of the armed services. These are designed to help offset the extraordinary burden of service and provide additional financial compensation for members of our military. It is important for those serving to understand their military tax advantages so they can make the most of them when filing their tax returns.
Tax exempt allowances
Military pay has several components. Typically, compensation for members of the armed forces includes basic pay such as salary, plus special allowances for housing and food.
"The housing and food allowances help officers and enlisted members to pay for the basics for their families and helps to take the sting out at tax time," says Sergeant Adam Kowalski, an Army recruiter.
Both of the allowances are exempt from state and federal income tax and Social Security tax, although periodic cost-of-living adjustments are taxable. Since these exempt payments average more than 30 percent of a service member's total regular compensation, members of the armed forces realize a tax benefit that lets them keep substantially more of their pay than similarly situated civilians.
Combat zone exclusion
When a member of the armed forces is deployed into a combat zone, base pay or re-enlistment bonuses paid during that time period is excluded from taxable income.
"When deployed in a combat zone, there is extreme stress on a daily basis. Knowing that your family will be able to keep more of your pay during this difficult time allows you to focus even more on the task at hand and worry less about trivial financial matters back home," Kowalski says.
In practical terms, if a service member spends any part of a month deployed in a combat zone, all of that month's earnings are free from state and federal income tax. There is a dollar limit for officers but not enlisted members.
Miscellaneous itemized tax deductions
Similar to normal civilian taxpayers, members of the military can elect to itemize their tax deductions on their tax return. Certain aspects of military life give rise to specific opportunities to itemize expenses, including required travel, education, and other unreimbursed employee expenses such as maintenance of uniforms that may not be worn when off duty.
Travel and transportation expenses
Members of the military can deduct unreimbursed travel and transportation expenses when traveling on official business away from their permanent duty station. Eligible expenses include transportation to official meetings or business functions away from the regular workplace (but not to and from the regular workplace), business-related meals, lodging, and other ordinary and necessary expenses.
Kowalski says, "I make a habit out of tracking any time I come out of pocket while traveling on official business, because it may come in handy when it’s time to file my taxes." However, these and other travel expenses are not deductible for a service member who is stationed overseas or traveling for personal reasons.
Unreimbursed educational expenses
Members of the armed forces may also deduct unreimbursed educational expenses relating to their official capacity in the service. If the education is required to keep your job and serves a legitimate defense purpose, or maintains or improves necessary skills, any unreimbursed expenses will be tax deductible as an itemized deduction on your personal tax return.
Forgiveness of tax liability
In the unfortunate event that a member of the armed services is killed while on deployment in a combat zone, or dies later from injuries sustained in a combat zone, his existing tax liabilities may be forgiven, and paid taxes can even be refunded to his surviving family.
Also, if a service member dies in a terrorist or other military action, he would likewise be eligible for forgiveness of his federal tax debt.
According to Kowalski, "There is no greater sacrifice than to die serving your country. Among the various ways this is recognized by the U.S. government is by its tax debt forgiveness for soldiers killed in action." Obtaining this relief requires a personal representative to make a timely claim for tax forgiveness.
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