NEW YORK (MainStreet) – Marching toward the April 15 tax deadline is tough for many taxpayers, but military personnel and their families face their own tax challenges.
With tax rules and everyday life for military families and their counterparts in the reserves varying distinctly from those followed by civilian taxpayers, there are a few elements that can get lost in the mix. The United Services Automobile Association in San Antonio and the National Disability Institute in Washington, D.C., regularly help military members and their families navigate the tax code and find the benefits, deductions and loopholes that come with life in the armed forces. According to those groups, the following are the most notable elements military families — especially those fairly new to military life — most commonly overlook:
Moving expenses: Johnette Hartnett, principal and senior director of research and strategy at the National Disability Institute, notes that members of the armed forces on active duty who have to move because of a permanent change of station can deduct unreimbursed moving-related expenses for themselves and their family.
Under normal circumstances, the Internal Revenue Service would require a taxpayer to meet certain time and distance requirements to deduct moving expenses. Joseph "JJ" Montanaro, a certified financial planner with USAA who spent six years on active duty in the Army Reserve, points out that those requirements are waived for service members and their families, who often don't have a say in where they go.
“One of the challenges of military life is that they move so often, and sometimes not because they want to,” he says.
State taxes: The Military Spouse Residency Relief Act makes it very clear that the only state military members and their families have to pay taxes in is the one where they've set up their legal residence.
“If I'm living in a state because my spouse is there serving in the military, that alone is not — as it used to be — reason to pay taxes in that state,” Montanaro says. “If I'm the spouse and my legal residency is in Texas and my spouse is serving in Kansas, it doesn't mean Kansas gets my income tax.”
Combat pay: Hartnett says people serving in a combat zone as an enlisted person or as a warrant officer for any part of a month are not taxed for military pay received during that time. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.
Montanaro adds that the IRS allows those service members to include tax-exempt combat pay as income so they can make an IRA or Roth IRA contribution while they're in a combat zone. Under those circumstances, they are also allowed to put $53,000 into their Thrift Savings Plan — similar to a 401(k) — which is substantially more than their civilian counterparts can contribute.
Lastly, they have the option of calling that combat pay “income” and taking advantage of the earned income tax credit, if they'd like. Montanaro suggests having a tax preparer calculate the tax hit of that added income against keeping it tax-exempt, just so military personnel have some idea of the advantages and disadvantages of each option.
Transitioning back to civilian life: Individuals may be able to deduct some costs incurred while looking for a new job, including travel, resume preparation fees and outplacement agency fees. Moving expenses may be deductible if the move is closely related to the start of work at a new job location and the individual meets certain tests, Hartnett says.
Travel to reserve duty: Members of the reserves can deduct unreimbursed travel expenses for travel more than 100 miles away from their home to perform reserve duties. From experience, Montanaro knows that deduction can make a huge difference.
“I was active duty, but I was also a reservist for 15 years,” he says. “I lived in St. Joseph, Mo., and had to travel to Topeka, Kan., which is like 150 miles away, so that allowed me to deduct travel expenses that would have been a real loss otherwise.”
Uniform costs and upkeep If military regulations prohibit a member of the military from wearing certain uniforms when off duty, they can deduct the cost and upkeep of such uniforms. But they must reduce their expenses by any received allowance or reimbursement.
“You get a uniform allowance while you're in the military, but you may get uniforms where the allowance didn't cover them,” Montanaro says. “Typically, you're able to deduct those costs.”
Those uniform deductions typically cover only uniforms, though. Any other costs, including body armor, weapons, ammunition and batteries for optical equipment, don't fall under that umbrella.
Joint return filing: Ever have to hold a tax return until your spouse could sign it? That isn't always necessary in military families. When one spouse is unavailable due to military duty, especially in a combat zone, a power of attorney may be used to file a joint return.
Tax filing extension: “Many of our brave men and women in uniform are serving in spots all over the world, so it makes sense that they may need extra time to file their taxes,” Hartnett says. That is why the deadline for filing tax returns, paying taxes, filing claims for refunds, etc., with the IRS is extended automatically for qualifying members of the military. For example, when military members are serving in a combat zone, Montanaro says they get an automatic two-month extension.
Selling a house: Finally, if you're moving because of permanent-change-of-station orders, residency requirements for tax breaks tend to change. Ordinarily, you have to live in a home two of the five years before a sale to get the $250,000 single or $500,000 couple's capital gains exclusion. That requirement is waived for personnel and their spouses who've received PCS orders.
If service members need more help, Montanaro suggests heading to Military OneSource for information about tax returns and for resources military members can tap into if they need help. Hartnett, meanwhile, recommends the National Disabilities Institute, Goodwill Industries and the United Way's MyFreeTaxes site, which provides free federal and state tax preparation and filing assistance for military families and veterans with a household income of $60,000 or less. Failing that, just look around your military facility for help. At this time of year, it should be in high supply.
“There are a lot of helping hands out there in terms of tax assistance," Montanaro says. "Most every installation out there has a tax assistance center so that service members can go in there for free and get assistance with preparing their taxes and, more importantly, work with somebody who is familiar with all the details of military service."
— Written by Jason Notte in Portland, Ore., for MainStreet
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