9 tax tips for members of the military

9 tax tips for members of the military | TIMOTHY A. CLARY/ Stringer/Getty Images

Being a member of the armed forces includes many challenges, including filing taxes. U.S. military personnel, whether on active duty or reserve service, must follow the country’s general tax rules.

Military personnel tax duties, however, can sometimes be more complicated than those faced by civilians. There are different types of income that servicemen and women receive, as well as frequent moves to posts, both domestic and overseas.

Plus, the issue of combat affects not only families, but also military members’ taxes.

Here’s an overview of some issues concerning military taxes, along with tips on how to deal with them.

And thank you for serving our country!

When to file

When to file | Ariel Skelley/Getty Images

Members of the military must meet the April tax deadline. Service personnel also have the same option as civilian taxpayers to postpone sending in 1040s until mid-October.

Obtaining an extension, however, differs depending on where military taxpayers are stationed.

If you’re posted in the United States or Puerto Rico, you can get a 6-month filing extension by sending IRS Form 4868 by the April due date.

However, servicemen and women stationed abroad for the entire tax year automatically get 2 more months, until June 15, to file their returns. If they then need the additional 4 months to file, overseas service members should submit Form 4868 by the June date.

Also, regardless of where stationed, extensions are granted to file forms, not to make payments. Depending on your posting, interest and penalties could be assessed on taxes not paid by the deadline.

Combat zone filing extension

Combat zone filing extension | Jordan Pix / Contributor/Getty Images

Service personnel in a combat zone get added time to file their returns.

Generally, a service member can postpone filing their taxes for 180 days after the end of their tour in a combat zone.

This extension also applies to military personnel who are hospitalized because of their combat zone service. In these medical cases, they have up to 180 days after the last day of continuous hospitalization to file or pay taxes.

In addition to the 180 days, the deadline is extended by the number of days that were left for the service member to file when he or she entered a combat zone. For example, if the service member had 20 more days to file when called to combat, the deadline to file is 200 days after the tour ends.

Plus, unlike other service members’ filing deadlines, the combat zone filing extension also applies to the payment of any due tax. During the allowable combat extension period, service personnel will not be charged interest or penalties attributable to the delayed deadline.

Where to file

Where to file | Gary John Norman/Getty Images

If you e-file, your tax software will take care of your return’s delivery. However, if you mail a paper return, where you send it also depends on your posting.

Personnel at a domestic base should send federal tax returns and payments to the IRS center that processes materials for that location. 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.

If you are overseas and have an APO or FPO address, file your return with the IRS center assigned to that APO or FPO address.

State tax filing

State tax filing | vgajic/Getty Images

The variety of postings that service personnel face sometimes contributes to state tax confusion. A service member may be a resident of one state and a domiciliary of another state.

The distinction is important. The federal Soldiers’ and Sailors’ Civil Relief Act allows military members to keep the state from which they entered military service as their official home or domicile. Only the state that is a service member’s official domicile can tax the military income and personal property of someone on active military duty.

That means from a legal standpoint, the military member’s domicile is often more important than the place in which he or she is physically stationed.

Check with your home, domiciled state’s tax department regarding its tax laws. Some states exempt military pay from taxes. However, any nonmilitary pay earned in the state where a service member is stationed is subject to that state’s tax laws.

Combat pay exclusions

Combat pay exclusions | Raphye Alexius/GettyImages

Some military income is tax-free at the federal level. Unfortunately, it is payment for serving under dangerous circumstances.

Pay for armed forces personnel can be excluded from taxable income if it is earned in a:

  • Presidentially declared combat zone.
  • Congressionally designated hazardous duty area.
  • Or, an area outside a combat zone or hazardous duty area.
  • But, where the duties are certified by the Defense Department as necessary for direct support of military operations in such areas.

This pay generally is referred to as combat pay. Enlisted service personnel can exclude all combat pay, meaning that it should not be included in wages reported on Form W-2. In some cases, pay earned during hospitalization from wounds, disease or injury incurred in a combat zone also is tax-free.

Commissioned officers also can exclude some combat pay, but the amount is limited.

Deferred tax payment

Deferred tax payment | Blend Images - Hill StreetStudios/Getty Images

As happens in civilian life, some military members find they are unable to pay their tax bills. In these cases, service members might qualify to defer the tax payment.

The first requirement for deferred-tax-payment consideration is that the person be performing military service. The service member also must notify the IRS that his or her ability to pay income tax has been materially affected by military service.

If the IRS concurs, the service member will be allowed up to 180 days after termination or release from military service to pay the tax. As long as the tax is paid in full by the end of the deferral period, there will be no interest charged or penalty assessed for that period.

Note, however, that this deferment only applies to income taxes. It does not apply to the military employee’s share of Social Security and Medicare taxes.

Combat pay and the EITC

Combat pay and the EITC | Blend Images - Hill StreetStudios/Getty Images

The Earned Income Tax Credit, or EITC, can be a great tax break for individuals, including military personnel, who don’t make much money. It requires, however, a bit of an income balancing act.

Essentially, a taxpayer who qualifies for the EITC has to have some earnings, but not so much that the benefit is reduced due to a higher income level.

Members of the military can add nontaxable combat pay to their earnings when figuring EITC amounts. This is helpful for military personnel whose earnings for the year might be primarily or completely from combat pay.

Service personnel have the choice of counting or not counting combat pay for EITC purposes. Figure the credit amount with and without combat money to determine which method provides a larger credit. The IRS’ interactive online EITC Assistant can help.

Military home tax breaks

Military home tax breaks | luoman/Getty Images

Military personnel lead peripatetic lives. That can pose problems when they must sell a home upon redeployment.

Generally, a homeowner who lives in a personal residence for 2 of the past 5 years before a sale doesn’t owe capital-gains tax on up to $250,000 (or $500,000 for married filers) of the home sale profit. But some military homeowners find the residency rule hard to meet and could end up owing taxes.

The Military Family Tax Relief Act of 2003 includes a provision for these armed forces homeowners. The law allows most military members on extended duty away from their home to suspend up to 10 years of their away-from-home service time. This means they can meet the residency rules and qualify for the full exclusion whenever they must move to fulfill service commitments.

In addition, under that law, any 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.

Military taxes in retirement

Military taxes in retirement | Blend Images - Hill StreetStudios/Getty Images

If you make money, you generally can contribute to an IRA. Military personnel get some special considerations in connection with their individual retirement accounts.

Even though combat pay generally is nontaxable, it counts for IRA purposes. While this money is not included in gross income, it is counted as compensation when figuring limits on IRA contributions and possible deductions of those contributions. In addition, extensions are granted for IRA contributions to military personnel in designated combat zones.

As for distributions, amounts withdrawn from an IRA before reaching age 59 1/2 are considered early distributions. These withdrawals typically face an additional 10% tax.

However, certain early distributions to qualified military reservists who are called to active duty are not subject to the additional tax. Personnel who can avoid the early IRA distribution tax under certain circumstances include members of the:

  • Army National Guard. 
  • Air National Guard.
  • The Army.
  • Navy.
  • Marine Corps.
  • Air Force.
  • Coast Guard Reserve.

For more information on military retirement, see Bankrate’s story on new retirement benefits.