Military Connection: Tax Considerations for Those Who Serve

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By Debbie Gregory.

When serving in the military, many sacrifices are made. There’s the relocation, leaving friends and family behind. There’s the threat of personal injury from being in harm’s way. As an acknowledgement of the debt we owe those who serve, the government acknowledges extends special privileges to reimburse military members in the form of tax advantages.

Combat pay perks offer a freedom from taxes. You qualify if you serve in a combat zone as an enlisted service member, or as a warrant officer, for any part of a month. This enables all of your income from that month to be exempt from federal taxation. For officers, the monthly exclusion is capped at the highest rate of enlisted pay, plus any hostile fire or imminent danger pay you may receive. The geographic areas considered tax-qualified combat zones are listed on the IRS website. Moreover, the IRS rules allow tax-free combat pay to be used for an IRA account. Since an IRA can grow, tax-deferred, until you withdrawal the money, contributing more now can provide a savings boost over the years.

Knowing that the last thing you want to do when you’re away defending our country is worrying about your taxes, the government offers an extension. While can’t put your taxes off forever, you and your spouse may qualify for a deadline extension of at least 180 days from when you return from combat. Extensions are available for filing returns, paying taxes, making claims for refunds, and contributing to IRAs.

Additionally, service members are awarded extra help when it comes to satisfying the “two out of five years” test for capital gains. This is especially helpful when selling a home. They are allowed to suspend the test period, for up to 10 years, when they’re on qualified extended duty. Extended duty is defined as assignment to a duty station a minimum of 50 miles from a primary residence for a period of 90 days or more.

Under the refined Military Spouses Residency Relief Act, military spouses can now choose to file as if they still lived in their previous state. This means a spouse could have the potential to save a lot of money if their previous state has lower tax rates or no income tax at all. In most cases, joint returns must be signed by both spouses. However, if your duties keep you away from your spouse and from your home, you can grant power of attorney to your spouse to file a joint return on your behalf.

Military service personnel can also receive assistance with moving deductions, separation assistances, and more. For complete details, you can download the IRS Publication 3, Armed Forces’ Tax Guide, which will summarize most important military-related tax topics. You can also order it by calling 1-800-TAX-FORM (1-800-829-3676.)

Alternatively, if you are stationed and residing overseas, you are allowed an automatic two month extension to file your return and pay any taxes, without requesting an extension. If you are unable to file your return by the automatic extension, you can request an additional extension to October 15th by filing Form 4868 before the initial two month extension date. However, any tax due payments made after June 15th will be subject to both interest charges and failure to pay penalties.

 If you are experiencing a tax problem that is causing you economic harm or has not been resolved through normal channels, you can contact the Taxpayer Advocate.