Top four tax tips for military families
Military families face special tax circumstances that can save them money and relieve some of the burdens of filing. But these benefits can also add complexity to their return and a greater risk of leaving money on the table. Every military family should know these four special circumstances that uniquely affect them:
Different types of pay are treated differently
Combat pay is not taxed, but that money may be included or excluded as earned income to qualify for or increase the earned income tax credit (EITC). It is also used to qualify for or increase the additional child tax credit (ACTC) if needed.
This flexibility can give service members a double benefit: not only can they reduce their income taxes by excluding combat pay from their gross taxable income, but they can also use – or not – the income for these two important credits that can be worth more than $6,000. So if they do not have enough earned income to qualify for the EITC, or more earned income will increase the EITC, they can elect to include their combat pay in the calculation. On the other hand, if they have too much earned income to qualify for the EITC or more earned income would decrease the credit, they can exclude their combat pay. In either case, combat pay is always used to qualify for or increase the ACTC. It can never decrease the credit. Generally, the tax treatment of income is not this flexible.
Living, family, death and moving allowances are also not taxed and are not earned income.
Tax breaks for relocations and everyday expenses
Military personnel who move due to a permanent change of station may be eligible to deduct unreimbursed expenses necessary for the relocation of their household. Taxpayers don’t have to itemize their deductions to take this tax break and do not need to meet time and distance requirements that most taxpayers must meet to deduct their moving expenses.
Service members may also deduct the cost and upkeep of military uniforms if they are prohibited by military regulation from wearing the uniforms when off duty.
Reservists can deduct unreimbursed travel expenses if they travel more than 100 miles from home to report for reserve duties.
Deadlines move back for those outside the U.S. and in combat zones
Military personnel serving in the U.S. or Puerto Rico must submit their tax returns by the April deadline unless they apply for a six-month extension to file by October. To avoid late fees and interest, taxpayers must estimate their taxes owed and submit payment by the April deadline.
However, if they are on a tour of duty outside the United States or Puerto Rico their tax filing deadline is automatically delayed two months to June 15. Applying for an extension to file gives them an additional four months until the October extended deadline.
And for those serving in a combat zone, the extension to file tax returns and even pay taxes due is 180 days after either the last day they serve in a combat zone or the last day of any continuous qualified hospitalization for an injury from service in a combat zone, whichever is later.
Understand state residency rules for spouses
Service members often retain residency status in their home states, despite frequent moves during active duty. Spouses may also retain residency status in their home state if they move with their military spouse. Under these rules, the spouse’s pay earned where they are stationed is not taxed in the duty state, but instead in the home state.
A civilian will not automatically be granted the same residency of their service member spouse. Instead, residency must be declared and the spouse must meet three requirements to qualify for relief:
- The spouse moves with the service member to the duty state in compliance with military orders
- The spouse is living in the state solely to be with the service member
- The spouse and service member share the same home state.
The implementation of this protection is different across the states, so many service members and their spouses have paid state taxes they didn’t owe. If a service member thinks errors were made on past returns, amended state returns can generally be filed for the past three years, which includes tax years 2014, 2015 and 2016.
If military families have questions about their residency rights or tax benefits, they should contact their state tax office or a qualified tax professional.