As this month of June ushers in the 79th anniversary of D-Day which was the largest naval, air and land operation in history, at that time, and signified the beginning of the end of World War II, it is apt to honor our military members and highlight a few tax breaks available to service members serving here and abroad.
1. Combat Zone Exclusion
Generally, income earned from employment is taxable, but certain exceptions may apply. For instance, if you're a member of the Armed Forces serving in a designated combat zone, or you were hospitalized from wounds, disease or injury obtained while serving in a combat zone, you can exclude from tax the pay you receive in certain situations.:
2. Moving Expenses
Under the Tax Cuts and Jobs Act (TCJA), the deduction for job-related moving expenses is generally suspended from 2018 through 2025. However, that provision doesn't extend to active-duty military personnel. If you qualify, you may write off the amount of unreimbursed moving expenses related to travel and the cost of moving household goods and personal effects.
3. IRA Contributions
Members of the Armed Forces are subject to the same basic rules for traditional and Roth IRAs that apply to civilians. Note that you must have "earned income" to qualify for contributions to an IRA. However, if you receive tax-exempt income in a combat zone, the income is still treated as earned income for this purpose.
4. Filing and Paying Deadlines
Absent extenuating circumstances, civilians must adhere to deadlines for reporting income and paying tax. But certain members of the military, such those who serve in a combat zone or contingency operations outside the United States, can postpone many tax deadlines. Those who qualify may get an automatic extension of time to file and pay their taxes. In contrast, civilians can only extend their filing deadline.
5. Reservists' Travel Expenses
If you travel as a member of the Armed Forces Reserves, you can generally deduct unreimbursed travel expenses while performing reserve duties more than 100 miles from your home. You may also be able to deduct the costs of overnight stays, such as meals and lodging. The deductible amount of these expenses — claimed as an adjustment to gross income — is limited to the regular federal per diem rate for lodging, meals and incidental expenses.
Important: You don't need to itemize deductions on your tax return to take advantage of this break.
6. Home Sale Gain Exclusion
Generally, single filers can exclude from tax up to $250,000 of gain from the sale of a home ($500,000 for married couples who file jointly). To qualify, taxpayers must have owned and used the home as their principal residence for at least two of the five years prior to the sale. However, active-duty service members who are away from home due to a permanent station change can extend the five-year period to 10 years. In other words, it becomes a two-out-of-10-year rule for these individuals.
7. State Residency Options
Active Duty servicemembers who are relocated and their accompanying spouses can choose to keep their prior residence for tax purposes. This can provide big savings if your former residence is in a state with no or lower income tax. Additionally, if you’re the civilian spouse of an Active Duty U.S. military servicemember, you can choose to have the same tax residence as the servicemember. For spouses of servicemembers, it can provide substantial tax.
8. Veterans Benefits
There's a wide range of tax-free benefits available to retired military veterans. For example, disabled vets may be eligible for a 100% tax exemption for disability compensation. And permanently disabled wartime vets over 65 may qualify for tax-free pensions. However, if you receive a disability pension based on your years of service, you must include that amount or portion of a pension in your taxable income.
9. ROTC Allowances
Military-related tax breaks aren't necessarily limited to taxpayers out of school. For participants in the Reserve Officers' Training Corps (ROTC) program at a college, education and subsistence allowances generally aren't subject to tax. But active-duty pay from a ROTC camp in the summer is taxable.
10. Tax Return Signing
The IRS generally won't accept a joint tax return it unless it's signed by both spouses. However, if one spouse is absent and can't sign due to military duties or conditions, the other spouse can sign in his or her place. In other cases, a power of attorney is generally required. A military installation's legal office may be able to lend assistance.
New Law Approves Military Spouse Credit
The SECURE 2.0 Act carves out a new tax credit of up to $500 for small businesses that encourage retirement saving by a military spouse. Under the new law, an eligible employer is entitled to a $200 credit for a military spouse who participates in a defined contribution plan (such as a 401(k) plan). Another credit of up to $300 applies to employer contributions made to each military spouse. The credit is available for the tax year that the spouse starts participating in the plan and for the next two tax years.
To qualify for this tax break, the employer must have had 100 or fewer employees who received at least $5,000 of compensation in the prior year.
Important: The credit isn't available to small businesses with just a defined benefit plan.
We Can Help
This list isn't all-inclusive. Contact your HPG tax advisor to ensure you're getting all the tax benefits you're entitled to receive for serving your country — and thank you for your service!