Members of the military work hard to serve our country. When tax time comes, the government recognizes the service of its armed forces by giving some members of the military certain tax benefits. For one, members of the military serving overseas get an automatic extension giving them until June 15 to file their tax return, and those serving in a combat zone have 180 days after they return to file. Further, our men and women in uniform also qualify for a number of special deductions.
To find out more about some of the most lucrative tax benefits available to military service personnel, we asked three Motley Fool contributors to talk about the provisions they saw as the most valuable. If you're in the armed forces, take a close look to see whether you can use these tips to improve your financial situation.
One of the biggest tax breaks that military members can qualify for is the exclusion of income earned while serving in a combat zone. Enlisted personnel or warrant officers are entitled to have all of their military pay excluded from gross income for tax purposes, while commissioned officers are allowed to exclude a portion of their income equal to the highest level of enlisted pay, plus any additional pay for being subject to hostile fire or imminent danger. Only members of the Armed Forces are entitled to this pay; neither civilian government employees nor private defense contractors deployed alongside members of the military get this tax benefit.
Those who are injured in a combat zone and are then hospitalized are entitled to have their pay excluded for the period of their hospitalization, with a maximum period of two years after leaving the combat zone. Annual leave payments accrued during work in a combat zone are also excludable, even if they're not paid until after the military member leaves the zone.
If you're entitled to the combat pay exclusion, then the government should reflect that fact on the W-2 tax form you receive after the end of each tax year. If you believe you qualify for the exclusion but it's not reflected accurately on your W-2, then you should ask your service branch for a corrected W-2 in order to avoid an unnecessary audit.
Members of the military and their spouses can keep their former state of legal residency for tax purposes if they are stationed elsewhere. This can be a huge benefit if you are stationed in a high-tax state but have residency in a state with low or no income taxes. If you or your spouse had wages withheld for state taxes in the state where you're stationed, then you'll have to file a nonresident tax return with that state in order to get a refund.
Note that your state of legal residence should not be confused with your "home of record." Your state of legal residence is the state in which you are legally a resident and which you intend to make your permanent residence. You can change your state of legal residence at any time. Your home of record is the state in which you enlisted, and it cannot be changed. This is important, as certain military benefits are based on your home of record.
Residents of Alaska stationed elsewhere should note that military members stationed outside of Alaska must meet certain requirements to remain eligible for the annual Permanent Fund dividend. You can find these requirements on the fund's website.
A third tax benefit military members enjoy is that living allowances are not taxable. These include the Basic Allowance for Housing and the Basic Allowance for Subsistence, which, if you have dependents, can add up to a significant portion of your income.
Most military members move a lot. Uncle Sam permits civilians and soldiers alike to deduct some moving expenses, but he's a little more generous to the military. For example, in order to qualify for the moving expenses deduction, most folks need to be moving for a new job that's at least 50 miles farther away from their old home than their previous job was. That distance rule doesn't apply to military folks, though.
If you're an active-duty military person moving because of a permanent change of station order, you can deduct many of your unreimbursed moving expenses. (Note that you cannot deduct any expenses for which you were reimbursed -- that would be double-dipping!)
You'll need to use IRS Form 3903 to claim your moving expenses. The kinds of expenses that qualify include packing, crating, hauling, storing (while in transit), and insurance expenses. While your belongings are in transit, you may also deduct your own lodging and travel expenses -- but not meals. If your move involves traveling to a foreign country or between two foreign countries, then you may also be able to deduct longer-term storage costs and the expense of moving belongings into and out of storage.
Another tax break applies to National Guard members or Armed Forces reservists. When you're called to travel more than 100 miles and stay overnight, you can deduct the cost of work-related travel and lodging, as well as half of your meal expenses, so long as they're within limits -- and you can do this without itemizing your deductions, too. To learn about all of these breaks, look into the IRS rules more closely or consult a tax pro to be sure you follow all the rules.