Tax Benefits for Members of the U. S. Armed Services

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

If you are a member of the United States Armed Forces, there are a number of provisions in the Internal Revenue Code that will reduce your income tax liability. Generally speaking, these benefits are available to commissioned officers, warrant officers, and enlisted personnel in all regular and reserve units in the Army, Navy, Marines, Air Force, and Coast Guard.

Excluded Items

Probably the most significant exclusion from income is the combat pay exclusion. Any compensation you receive for active duty below the rank of commissioned officer is not included as taxable income while serving in an area designated by the President as a combat zone. Commissioned officers receive a limited exclusion. This exclusion is available for any month in which you served in a combat zone. Income is also excluded fi you were absent from duty because of sickness, wounds or leave while assigned to a combat zone. You are also considered to be serving in the combat zone if you are a prisoner of war or missing in action. The amount of excluded combat pay will be listed on your W-2 as Code Q in box 12.

Most living, moving, and housing allowances are excluded. Family allowances for emergencies, evacuation, and separation are also excluded. Certain education expenses for dependents are not subject to tax. In-kind military benefits such as medial and dental care, legal assistance, and dependent care assistance are not taxable. Uniforms provided to enlisted personnel and uniform allowances not taxable. Payments received for professional education are considered a non-taxable job benefit.

Hopefully, one benefit that you will not be able to use is the death gratuity benefit. The survivor of a member of the U. S. Armed Services receives a $12,000 death gratuity payment. This is fully excludable from taxation.

Exclusion of Gain on the Sale of Your Home

Most taxpayers can exclude up to $500,000 of gain from the sale of their personal residence. To qualify for this exclusion you must have owned the house and lived in it as your main home for 24 of the past 60 months. However, if you are on qualified extended duty as a member of the U. S. Armed services, you may suspend the 5-year test period.

Qualified extended duty applies if you serve for more than 90 days at a duty station at least 50 miles from your main home or while you live in government quarters under government orders.

The 5-year test period can be extended for up to 10 years for any time you were on qualified extended duty. For example, suppose that you lived in your home for three years and were then assigned to qualified extended duty for seven years. Normally, this would mean that you would not meet the rule for living in the house as your main home for 24 months in a five-year period. This provision lets you ignore the seven years of qualified extended duty time and exclude the gain when you sell the house.

Moving Expenses

In order to deduct moving expenses most taxpayers must meet the time and distance tests. These tests require that the new job must be 50 miles further from your old home than your old job was. As a member of the Armed Forces you do not have to meet these tests. Moving expenses are deducted on Form 3903.

If a member of the Armed Services deserts, is imprisoned, or dies the spouse or dependents may deduct moving expenses to the place of enlistment, the home of record, or a nearer point is the United States.

Deductible moving expenses include moving household goods and personal effects to the new home. Travel and lodging expenses for you and your dependents incurred enroute to the new home are also deductible. However, you cannot deduct the cost of meals. A standard mileage rate of 22 cents per mile applies when driving your personal vehicle. If your new home is not ready to move into you may deduct the cost of storing and insuring your household goods for up to 30 days.

If your move is a foreign move, deductible expenses are expanded to include moving your household goods and personal effects to and from storage and storing these items for part or all the time your job location remains outside the United States.

Deductible Employee Expenses

As with most employees, personal expenses you incur in the performance of your duties as a member of the Armed Services may be deductible if you itemize your deductions. Some of these deductions are unique to military personnel.

A member of an Armed Forces reserve unit can deduct the cost of getting from his regular workplace to his reserve unit if the meeting occurs on a regular workday.

As a rule, the costs of your uniforms and their upkeep are not deductible expenses. You can deduct:

• Military battle dress uniforms and utility uniforms if you cannot wear them off duty.
• Reservists' uniforms if you wear the uniforms only while performing duties as a reservist.
• Articles not replacing regular clothing, such as insignia or rank, corps devices, epaulets, aiguillettes, and swords.

You can also deduct dues for memberships in professional societies directly related to your military position. You may not deduct dues to officers' clubs or NCO clubs.

Earned Income Credit

Normally, earned income for purposes of determining the earned income credit (EIC) includes wages, salaries and other taxable employee pay. If you receive nontaxable combat pay, you may elect to include this in earned income for EIC purposes. This does not subject the combat pay to income tax, but may increase the amount of the earned income credit that you can receive. You should calculate your EIC both ways to determine which approach gives you the maximum benefit.

Decedents

In addition to the death benefit gratuity, a surviving spouse or personal representative of the deceased may receive combat zone tax forgiveness. This provision forgives the income tax on the decedent's income in the year in which the death occurred and for any prior tax year during which the member served in a combat zone in active service. The liability is forgiven for a military or civilian U. S. employee who dies from wounds or injury while a U. S. employee in a terrorist or military action. This applies only to the income of the deceased, and not to earnings of the spouse.

If the return has already been filed an amended return (Form 1040X) may be filed to obtain a refund of the taxes paid. There are a number of technical requirements for obtaining the refund and you should consult IRS publications or a tax professional to be certain this is properly submitted to the IRS.

Extensions

As with all taxpayers, you can obtain an automatic six-month extension of the time to file your return by filing Form 4868 by the due date of the return. This is an extension of the time to file, you must pay any estimated tax owed at the time you file the extension.

If you are living outside the United States, you get an automatic two-month extension of the time to file without filing Form 4868. Filing a 4868 will give you an additional four months to file.

The deadline for filing return, paying taxes, and other actions with the IRS is automatically extended if any of the following apply to you as a member of the Armed Services:

• You serve in a combat zone or have qualifying service outside a combat zone.
• You serve in a qualified hazardous duty area or are deployed overseas away from your permanent duty station in support of operations in a hazardous duty station area.
• You are deployed away from your permanent duty station while participating in a contingency operation.

This extension is for up to 180 days after the above duty terminates. In addition, the deadlines are extended by the amount of time you had to take action with the IRS at the time the duty began. For example, if you are called into a hazardous duty area on March 15, you have an additional 30 days because your tax return was not due until April 15.

This article has only been an overview of the tax benefits available to members of the United States Armed Services. You can obtain more detailed information from IRS Publication 3 or www.webtaxcenter.com. You should also consult your professional tax advisor for assistance in determining your eligibility for any of these benefits.

________________________________________
Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

• File Your Return Online! Free Online Tax Preparation! FreeTaxUSA.com 100% Accuracy Guarantee Safe & Secure Free Federal, State Only $9.95 learn more...