With the start to the new year behind us, it is time to once again plan ahead for tax season. With the exception of those serving in combat zones or stationed outside the U.S, most military personnel and their families must file taxes by the traditional April 15 deadline.
As usual, there are a number of unique credits and deductions available to servicemembers. This article will focus on the deductions available to military families. All information in this piece is based on information supplied by the IRS in the Armed Forces Tax Guide. For further clarification or for additional deductions, as well as information on available tax credits, you should refer to this document.
Military servicemembers receive many different types of pay. For tax purposes, it is important to identify the types of pay and allowances that can be excluded from your gross income. These exclusions generally include: living allowances, moving allowances, travel allowances, combat zone pay, and death allowances. Excluded items are not subject to tax, but may have to be shown in your tax return. Below, we will examine some of these exclusions as well as relevant deductions from income in more detail.
Combat Zone Exclusion
If you are a member of the Armed Forces serving in a designated combat zone, then you can exclude certain pay from your income. The month for which you receive this pay must be a month in which you either served in a combat zone or were hospitalized as a result of wounds, disease, or injury obtained while serving in the combat zone. You need only serve for one or more days in a month to qualify for exclusion for the entire month. A few examples of pay types eligible for exclusion include:
- Active duty pay earned in any month you served in a combat zone
- Imminent danger/hostile fire pay
- A reenlistment bonus if this extension occurs in a month you served in a combat zone
- Pay for accrued leave earned in any month you served in a combat zone
- Portion of any student loan repayment made for the year while serving in a combat zone
It is important to note that retirement pay and pensions do not qualify for combat zone exclusion. In some cases, service outside a combat zone can be considered service in a combat zone if the Department of Defense designates it in direct support of military operations in the combat zone, or if the service qualifies for duty subject to hostile fire or imminent danger pay.
Generally, you can deduct some portion of the contributions you make to your traditional individual retirement account (IRA) for the year. However, if you or your spouse were covered by an employer-maintained plan at any time during the year then not all of these deductions may be eligible. According to the IRS, Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan.
Keep in mind that military personnel qualify for additional time to make contributions to an IRA. It is also important to note that even though combat pay is nontaxable, you must calculate it as part of your limits on IRA contributions and deductions of IRA contributions.
Sale of a Home
You may not have to pay tax on all of the profit realized from the sale of your main home. A deduction of up to $250,000 of gain (or $500,000 if married, filing jointly) is generally available upon the sale of a main home in 2009. A main home is one defined as having been lived in as a primary residence for more than two years. You may also be able to exclude gain from the sale of a home that was used as a rental or business property as long as it meets certain ownership test criteria outlined by the IRS. You cannot deduct a loss from the sale of your main home.
If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, then you are entitled to a deduction for reasonable un-reimbursed moving expenses related to travel and the cost of moving household goods and personal effects.
You are able to deduct un-reimbursed work-related travel expenses when you are traveling away from your permanent duty station. You cannot deduct expenses related to travel overseas when you are stationed there, or when you are traveling for personal reasons. You are considered away from home when you are away from your permanent duty station for longer than an ordinary day's work and you need sleep or food. Eligible expenses include business-related meals, lodging, laundry, and business phone calls.
If you are a member of a reserve component of the Armed Forces that must travel more than 100 miles away from home in connection with your service, then you can deduct your travel expenses as an adjustment to income.
The costs of traveling from one workplace to another, attending a business meeting away from your regular workplace, or traveling away from home overnight can be deducted from your income. However, the expenses of commuting to your regular place of work are not deductible. For reservists, if a meeting of a reserve unit is held on a day of regular work, then related travel expenses are deductible.
Generally, these are not deductible, except when regulations prohibit you from wearing uniforms off duty. In this case, you can then deduct the un-reimbursed cost and expense of upkeep of the uniforms. According to the IRS, examples include:
- Military dress uniforms and utility uniforms that you cannot wear when off duty
- Articles not replacing regular clothing such as insignia of rank, epaulets, and swords
- Reservists' uniforms if they can only be worn while performing reservist duties
- Professional dues
You can deduct dues paid to any professional society that is directly related to your military position (ex. engineering society), but you cannot deduct dues paid to an officers' club or a noncommissioned officers' club.
You can deduct the cost of work-related education as long as it meets one of two qualifying criteria as defined by the IRS:
- It is required by your employer or the law to maintain your salary, status or job. This must also serve a bona fide business purpose of your employer.
- It maintains or improves skills needed in your present work.
In both instances, this education cannot be used simply to meet minimum job requirements or cannot be used to find a new trade or business. With some exceptions, travel and expenses for obtaining this education can also be deducted.