Special Tax Benefits for Military Personnel
What special tax benefits are available to military personnel?
There are a number of unique tax credits and deductions available to military personnel. Military service members receive a variety of different compensations, and thus for tax purposes, each type of pay and allowance must be separately identified, which is done on the LES. Service members have several income exclusions (the pay or allowance is not listed as part of gross pay for the tax year). These include: living/housing, moving, travel, and death allowances as well as combat-related pay. Excluded income items are not subject to income tax, but may have to be shown as part of your tax return.
Are there special rules related to combat pay?
Armed Forces Service members deployed to a designated combat zone may exclude certain pay from their income. Typically, one day in the combat zone will qualify for the exclusion for the entire month. Retirement pay and pensions do not qualify for combat zone exclusions. The pay and allowance types that are eligible include:
- Active duty pay
- Imminent danger/hostile fire pay
- Reenlistment bonuses if the extension occurs during a month served in a combat zone
- Pay for accrued leave
- Portion of student loan repayments
Am I eligible to contribute to an IRA?
The IRS considers Armed Forces personnel as covered by an employer-maintained retirement plan. Thus, to make a deductible contribution to an Individual Retirement Arrangement (IRA), the service member is subject to phase-out rules based on their adjusted gross income and filing status.
Do I have to pay tax if I sell my home because of a military transfer?
A deduction of up to $250,000 of capital gains on the sale of your primary residence is available to all tax payers ($500,000 if married, filing jointly). Military personnel are offered more flexibility in the time requirements for determining how long they must reside in a residence to be eligible for the deduction.
What if I have un-reimbursed moving expenses due to a military transfer?
If you must move because of a permanent change of station (PCS), then you are entitled to deduct the un-reimbursed moving expenses that are related to your travel and the cost of moving your household goods.
What other expenses are deductible for military personnel?
Depending on the situation, military personnel may be available to deduct a portion of un-reimbursed work-related travel and transportation expenses, such as business-related meals, lodging, laundry, and business telephone calls. Expenses related to commuting to and from your regular place of work are not deductible. Uniform expenses are generally not deductible, unless regulations prohibit you from wearing the uniform item while off-duty. Some un-reimbursed educational expenses are deductible if they are required by the military for you to maintain your qualifications or skills in your current position.
IRS Publication 3, The Armed Forces’ Tax Guide, provides information on the special tax situations of active members of the U. S. Armed Forces. For information on military pensions and veterans’ benefits, see IRS Publication 525, Taxable and Non-taxable Income.
For an individual consultation concerning financial planning associated with income taxes, call a Member Services Advisor at AAFMAA at (800) 522-5221.
John Sledgianowski is an AAFMAA Benefits Advisor.