Filing taxes is stressful enough under normal circumstances. When you’re a member of the armed forces, your tax situation can be even more difficult, especially if you’re serving overseas or in a combat zone.
Bankrate’s Tax Guide
U.S. military personnel, active and reserve, are not exempt from taxes. You must pay any federal taxes owed by the April filing deadline, even when stationed abroad.
But there are some special rules that apply to military taxpayers stationed domestically and those serving in hazardous areas. Recently enacted legislation also has enhanced some tax breaks for service personnel and their families.
Paperwork, not payment, relief
First, a look at tax-filing requirements. While the IRS expects its payments by April 18 this year, members of the military have the same right as civilian taxpayers to postpone sending in 1040s for up to six months.
How a service person gets the extension, however, depends on where he or she is stationed.
Military personnel in the United States or Puerto Rico must file Form 4868 to extend the filing deadline to Oct. 15. Submit the form by the April deadline via mail, phone or the Internet. Any tax you owe must accompany the form if you send it by the postal service. However, if you pay your tax bill by credit card or by authorizing an electronic withdrawal, you do not have to submit the form itself.
You won’t get any approval notice from the IRS after you send in the form. However, the agency can deny a request that isn’t filed by the April deadline. In this case, the IRS will inform you of the denial.
If you are stationed outside the United States or Puerto Rico, or your tour of duty takes you abroad for the entire filing period, you automatically get two more months to file your taxes. There is no need for an additional form, just send in your return and any tax due by June 15 instead of April 15.
Be sure to write “Taxpayer Abroad” at the top of your 1040 and attach a statement explaining your international posting situation. If you find in June that you still need more time, then you’ll have to file Form 4868 to move your tax return deadline to mid-October.
And remember that all extensions are granted for the paperwork only. If you owe tax, it must be paid or arrangements made to meet your bill by the April deadline. You will be charged interest on any unpaid tax not sent by the regular due date and could face penalties for late payment.
Where to file
Where you must send your return also depends on your posting.
If you’re at a domestic base, send your return and payment to the IRS center that processes materials for your posting. For example, if you are stationed in Texas but your permanent residence is in California, you would send your return to the service center for Texas. Service center addresses are listed in the instruction booklets for each of the tax returns.
If you are stationed overseas and have an APO or FPO address, file your return with the service center in Austin, Texas.
Combat zone special rules
Tax guidelines change dramatically, however, for soldiers and sailors in war settings.
If you’re serving in a designated combat zone or hazardous duty area, much of your military pay and reimbursements will be exempt from federal income tax. For commissioned officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.
The military paymaster should take care of this delineation for you, but you can find a listing of exactly what type of compensation or benefit is deemed taxable or exempt in IRS Publication 3, Armed Forces Tax Guide.
You’ll also automatically have later deadlines for filing tax returns, paying taxes, submitting refund claims or taking other actions with the IRS. The basic extension period is 180 days, but it might be lengthened depending upon when in the tax season you were shipped to a combat zone.
In determining your precise combat-related extension, start with the three and a half months (Jan. 1 to April 15) that each taxpayer has to file a return. Any days of this period that were left when you entered the combat zone or the entire filing period of 105 days if you entered the combat zone by Jan. 1, are added to the standard 180-day extension. You could potentially earn an extension of 285 days to complete your tax tasks.
You don’t have to be in combat for this IRS rule to apply. If you are deployed to a region in support of but not directly involved in combat, you also receive the 180-day (or longer) extension. In addition, the deadline for the IRS to take certain actions, such as tax collection and examination of your returns, is extended and no penalties or interest will be imposed for not filing or paying taxes during this time.
- When filing returns, mark “Combat Zone” at the top of the form along with the date of deployment.
- Contact the IRS at its special e-mail address email@example.com. Correspondence should include the name, stateside address, date of birth and date of deployment of the service member. Do not, however, include your Social Security number in the e-mail. The IRS emphasizes only military-related e-mails should go to this address.
- Call the main IRS help line at (800)829-1040.
The IRS works with the military to obtain information about reservists and regular military personnel serving in combat areas.
If, however, the IRS does not get up-to-date military status for filing purposes, service personnel, their spouses or their authorized representatives have several options to claim the filing extensions or filing exclusions:
Service personnel serving in a combat zone (or their representatives) can also call or e-mail the IRS in cases where the military member (or his or her spouse) receives a tax notice. The notice can be deferred by following the e-mail steps or by sending the notice back to the IRS marked with the words “Combat Zone” in red ink and the date of deployment.
Payment deferments for new soldiers
In addition, some new military personnel might qualify for a deferral of due taxes even if they are not in a combat zone. If these servicemen and women meet eligibility guidelines, they need only show that their ability to pay taxes was impaired because of their military service.
This special tax relief is granted by the Soldiers and Sailors Civil Relief Act to active duty members of the Army, Navy, Air Force, Marine Corps and Coast Guard. Reservists must be placed on active duty to qualify. National Guard personnel not serving in a “federalized” status (that is, called to active duty specifically by the President) are not covered here.
Under the law, eligible military personnel may delay payment of taxes that came due before or during their military service. The payment deadline is extended to six months after your military service ends. No interest or penalty charges are applied during this time.
- Be in the initial period of military service. This option is not available during re-enlistment periods.
- Request the deferment. It is not automatic.
- Prove both that you cannot pay your tax bill and that your inability to pay is because of your military service.
- Have received a notice of tax due or already be on an installment agreement with the IRS.
If you are eligible for possible tax-payment deferment, you can contact the IRS at (800)829-1040 about your situation and the steps you need to take. And keep in mind that payment deferral does not extend your deadline for filing a return. You may be able to get extra time to file under one of the other provisions, such as overseas posting or combat zone duty, discussed earlier.
Combat pay and the EITC
The Earned Income Tax Credit can be a great tax break for individuals, including military personnel who don’t make much money.
To claim the credit however, you must have, as the name indicates, earned income during the tax year. Previously, tax law did not allow service personnel to count nontaxable combat pay as earned income for tax credit purposes.
Now, however, you can add your combat pay (which remains nontaxable) to your earnings in computing how much of the EITC you can claim. This is helpful for military personnel whose earnings for the year might be primarily or completely from combat pay.
The choice to count your combat pay for EITC purposes is yours. In making the decision, you must do a bit of a balancing act. Essentially, you want to earn enough income to qualify for the credit, but not so much that your benefit suffers because the higher your income, the lower the credit.
Figure the credit amount with and without your combat pay. If it gets you a larger credit, use it. Don’t include it if it increases your earned income so much that your credit is reduced. You can run the numbers both ways at the Internal Revenue Service’s interactive program, the EITC Assistant, to help you decide.
Tax breaks for military homeowners, parents
Soldiers who have to sell a home because they are redeployed get a break on any capital gains they might otherwise face because they didn’t own the property very long.
Generally, when a homeowner lives in a personal residence two of the past five years, up to $250,000 (or $500,000 for married filers) of capital gains on the sale is tax-free. Some military homeowners have found the residency rule hard to meet and ended up owing taxes.
Thanks to the Military Family Tax Relief Act of 2003, such homeowners are exempt from the two-year requirement (for up to 10 years). This means they qualify for the full exclusion whenever they must move to fulfill service commitments.
The military relief bill also eases the tax bite on some other items. Housing assistance provided by the military to compensate for a drop in home values because of base closures or restructuring is no longer considered taxable income. Neither is child care or other eligible dependent care expenses provided under a military assistance program.
Civilian as well as military parents with a son or daughter heading to a service academy also can make use of savings from education savings accounts and qualified tuition programs without tax problems. Previously, distributions in these cases were subject to a 10 percent tax penalty, but military school appointments are now considered scholarships, exempting the account distributions from the penalty provision.
National Guard and Reserve personnel weren’t forgotten. When these troops travel overnight for training, they can deduct travel and lodging costs even if they don’t itemize deductions when they file. The tax break is reported directly on Form 1040 instead of Schedule A.
Getting tax help
Because of the complexities of taxes and military service, not to mention the newly passed laws, you may need clarification about your specific tax circumstances. Don’t hesitate to talk with representatives of your base’s finance office.
Servicemen and women stationed abroad also can get tax information from January through mid-June at some U.S. embassies and consulates.
Additional tax information and updates for members of the armed forces are available year-round at a special IRS Web page.