Tax Credits That Help Military Families the Most

Military personnel and their families have enough to worry about around tax season that a few perks aren't too much to ask for.

Whether it's personnel serving abroad, who get until June 15 to file their tax return, or active-duty folks closer to home getting free tax-preparation options from the IRS' VITA service and companies like H&R Block and TaxSlayer, military members and their families have some tax options around this time of year.

While services like Military OneSource, which offers free online or in-person tax preparation and financial counseling for military members and their families, are helpful, it's the perks built right into the tax code that come in handier and puts some cash back in their pockets.

Joseph "JJ" Montanaro, a certified financial planner with USAA, who spent six years on active duty in the United States Army Reserve, notes that one of the biggest perks is not having your military pay taxed during your time in a combat zone.

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 $54,000 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.

Meanwhile, 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 (PCS) 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. USAA's Montanaro points out that those requirements are waived for service members and their families, who often don't have a say in the matter.

"One of the challenges of military life is that they move so often, and sometimes not because they want to," he says.

Military spouses, meanwhile, don't have to juggle all the tax-filing duties on their own if their loved one is overseas. A military spouse can file for power of attorney and file on behalf of someone in a combat zone. They also aren't forced to pay taxes in the state where their spouse is stationed. Thanks to the Military Spouse Residency Relief Act, 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."

Should a military move involve selling a house, military members catch a break there, too. While taxpayers can generally sidestep paying capital gains taxes on the sale of their home if they owned it and used it as their qualifying principal residence for two out of the five years preceding the sale, military members can suspend the five-year test period for up to a decade while they're on extended duty. As a result, they can exclude up to $250,000 in gains for individuals or $500,000 for married couples on the sale of a home.

Once active military personnel are back home, there are a bunch of perks waiting for them there as well. They can deduct costs of transitioning back to civilian life, including the costs of looking for a news job. That includes travel, resume preparation fees and outplacement agency fees. Even reservists 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, Kansas, which is like 150 miles away, so that allowed me to deduct travel expenses that would have been a real loss otherwise."

Finally, 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. However, they must reduce their expenses by any received allowance or reimbursement and can't deduct the cost of body armor, weapons, ammunition and batteries for optical equipment.

"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."

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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