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Serving Uncle Sam: Tax Breaks for the Military

Updated for Tax Year 2016


OVERVIEW

Military families are eligible for special tax breaks from the government. Many are also eligible for free tax filing with TurboTax.
 


Nothing can make up for the hardship of serving in the armed forces. But the government does offer some special tax breaks so that soldiers don’t have to add income taxes to their list of worries. If you serve in the military, here are some of the breaks that you might find helpful for your taxes.

Combat Pay Doesn't Count as Income and Is Not Taxable

While you don’t have to include combat pay as taxable income, it could provide a boost when figuring your Earned Income Tax Credit (EITC), which can reduce the amount of tax you owe and may even help you get a refund. By including combat pay when calculating the credit, you avoid reporting no earned income and not qualifying for the EITC. When you calculate the credit, you must include all or none of your combat pay in the calculation--you can’t include just part of it.

If you are an enlisted member, warrant officer, or commissioned warrant officer, you can also exclude other items from your income for tax purposes, including reenlistment bonuses, pay for accrued leave and student loan repayments.

Penalty-Free Retirement Plan Withdrawals

If you’re serving in the military reserves, you might be able to take early withdrawals from IRA and 401(k) accounts without penalty. To qualify for this exemption, you must have been called to active duty after Sept. 11, 2001 for more than 179 days, and you must make the withdrawal while you are on active duty.

Extension of Filing Deadlines for Those Serving in Combat Zones

Members of the military serving in combat zones get an automatic 180-day extension from the IRS for filing tax returns, paying taxes and filing refund claims. The automatic extension also applies to making qualified contributions to an IRA. However, this exception does not apply to Social Security and Medicare taxes.

Other Benefits for Soldiers

Here are some other tax benefits for military personnel:

  • Maximum interest rate capped at 6 percent. As a member of the military, you cannot be charged more than 6 percent a year on any money you may have owed the IRS before you entered military service. The reduced rate applies only if your service materially affects your ability to pay and applies to the interest the IRS charges you while you are a member of the military. 
  • Travel expenses for reservists can be written off. If you are a member of the reserves and you travel more than 100 miles away from home in connection with your service, you can deduct your unreimbursed travel expenses on your return as a more generous adjustment to income rather than as an itemized deduction.
  • Moving expenses are easier to deduct. To deduct these expenses, you normally must meet certain time and distance requirements. However, if you are a member of the armed forces on active duty and you move because of a permanent change of station, you do not have to meet the tests and can deduct your unreimbursed moving expenses.
  • Death benefits to survivors are not taxable. Survivors of armed forces members who die while on active duty receive a $100,000 tax-free death “gratuity” from the government. The gratuity is also paid to survivors of retirees within 120 days of retirement if the death is determined to be service-related.
  • Forgiveness of tax liability in the event of death. Members of the armed forces who die while on duty in a combat zone or in support of a combat operation are forgiven any tax liability they may owe the IRS. If you already paid the tax, that amount will be refunded to your survivor.

Tax Preparation for Service Members

TurboTax now offers a Military Edition specially designed for members of the military and their families. We look for deductions specific to military families and walk you through military-related tax situations including state of residence, uniform deductions and PCS.

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Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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