Serving in the military involves sacrifices that most Americans never make. In recognition of their services, members of the Armed Forces get some valuable tax breaks that make the money they earn go further. Below are three key provisions that military members and their families can use to get some much-needed tax relief.
Tax-free combat pay
The biggest tax break for active-duty military members is the tax exemption for combat pay. You can exclude your pay from income if you serve in a combat zone as defined by the President or in a qualified hazardous duty area designated by Congress while receiving hostile-fire pay or imminent-danger pay. In addition, those who serve outside those areas can nevertheless exclude their pay if the Department of Defense certifies that their service is in direct support of combat-zone military operations and receives hostile-fire or imminent-danger pay.
The exclusion is on a month-by-month basis, and any qualifying service during a month allows you to take the exemption for the entire month. Also, if you're hospitalized as a result of combat-zone service, then you'll still be eligible for the exemption even if the hospital is outside the zone.
There's a maximum amount for the exclusion, depending on your rank. Enlisted personnel can deduct their entire pay, but commissioned officers are limited to the highest rate of enlisted pay plus imminent danger or hostile fire pay. The military should calculate the appropriate amount on your Form W-2.
Special rules for Earned Income Tax Credit
The downside of the combat pay exclusion is that ordinarily, it might reduce the amount you'd be able to take for certain favorable tax provisions like the Earned Income Tax Credit. However, military personnel are allowed to treat their excluded combat pay as earned income for purposes of the credit while still keeping it out of their taxable income.
For instance, say you're married and the only working person in your family, and you served in a combat zone all year. You ordinarily wouldn't be eligible for the Earned Income Tax Credit at all because you'd have no taxable income. However, treating your combat pay as earned income could give you a credit. If you served in a combat zone, it's worth taking a look to see if this provision could help you.
Reduced state income tax burden
Finally, many military personnel have to move from base to base repeatedly over the course of their careers. If you're stationed in a state that charges high state income taxes, having to file their can cost you thousands of dollars.
Military personnel have historically been able to declare a state of legal residence that is considered their resident state for purposes of paying state income tax. However, spouses of military personnel weren't always entitled to that same protection. In 2009, the Military Spouse Residency Relief Act made it possible for the nonmilitary spouse of a military member to be treated as a resident of the same state as the military member, regardless of the state in which the spouse lives.
In many cases, the nonmilitary spouse will have to file a state tax return to get a refund of any state income tax withheld. However, the spouse is entitled to that tax savings, so it's worth the effort to do so.
These tax breaks make the burden on military families a little bit easier to bear. Knowing that these tax breaks are out there is crucial to make sure that you accept the honor that lawmakers have given members of the military in exchange for their service.