July 22, 2013

As the IRS puts it, military personnel “face unique life challenges with their duties, expenses and transitions.” It’s only fitting to give them exclusive tax breaks during service and once they retire.

Modest income families with children receive significant tax benefits. For example, the Earned Income Tax Credit (EITC) can help to support these families with a tax refund. For military families, the combination of the Earned Income Tax Credit and the tax free treatment of combat pay can have major tax benefits. We spoke to Justin Clement, Tax Attorney at Optima Tax Relief who explained:

“Take, for example, a soldier who is married with two children at home. In 2012, he earned $5,000 while stationed domestically and $25,000 earned in a combat zone. Since $25,000 was earned in a combat zone, only $5,000 of the income is taxable. At $5,000, the soldier would qualify for $2,010 in refundable tax credits. However, the tax code allows military families the option of including non-taxable combat pay in their earned income for purposes of the EITC. In our example, if the soldier included the $25,000 combat pay in his earned income (a total of $30,000), his EITC credit would increase from $2,010 to $3,609. Understanding this tax law could increase a military family’s refund by thousands of dollars a year.”

According to the IRS’ website, there are quite a few additional tax benefits for armed forces personnel to take advantage of:

Moving Costs. Active duty personnel ordered to move to another military station may be entitled to deduct moving expenses not covered by employer reimbursements.

Tax-Free Income. Individuals’ fighting in a “combat zone” or classified as a warrant officer for a partial or complete month are entitled to tax free military pay for that month or months of direct combat service. Officers’ pay is tax free only up to their greatest level of pay, in addition to any “hostile fire” or “imminent danger” compensation.

Extended Deadlines. Certain members of the Armed Forces can qualify for extensions related to:

  • Meeting tax obligations
  • Claiming a refund
  • Filing their tax forms

Deducting Service Related Travel Expenses. Reservists that are required to move than 100 miles from their home to fulfill their military service obligations may be entitled to deducted travel fees not reimbursed.

Uniform Deductions. Off-duty personnel may be entitled to deduct non-reimbursed or allowance costs related to uniform maintenance. This is applicable under some circumstances when off-duty restrictions prohibit personnel from wearing their uniform.

Serving Students. Students enrolled in Reserve Officer Training Corps (ROTC) receiving Subsistence pay during advanced training do not have to pay tax on that income.  

There are tax benefits and deductions for military veterans as well:

Military-to-Civilian Benefits. Veterans acclimating back to their civilian careers and life can benefit from numerous tax deductions. Deductible job-hunting fees include travel expenses, resume updating costs, and head-hunter associated fees.  Under certain circumstances a job-related move might be a permitted tax deduction.

Disabled Veterans’ Tax Benefits. Veterans receiving disability payments from the United States Department of Veterans Affairs are not factored into gross income calculations. Examples of payments received include:

  • Money for mechanized vehicles for blinded veterans or with a loss of one or more limbs.
  • Money to modify a home to accommodate a wheelchair.
  • Monetary support from a dependent-care assistance programs
  • Pension and disability payments for disabling injuries sent directly to veterans or family members.

Military Retirement Pay. Contributions from this compensation fund that goes towards their participation in the Survivors Benefit Plan (SBP) is not taxable. This pay, according to the IRS, is not classified as earned income and is not subjected to payroll taxes for Social Security.  

Enhanced Job Opportunities. Veterans have a greater chance of becoming hired through the Work Opportunity Tax Credit. Renewed in 2013, employers who hire qualified veterans are able to obtain a tax credit. This will help veterans distinguish themselves from competing candidates.

The men and women who are serving and have served in the United States Armed Forces are unique. They are seldom in one state (or country) for an extended period of time, are often in combat zones, and sometimes come home with life-altering injuries. The expenses can seem endless, but taking advantage of exclusive tax benefits can help curb the costs.