Tax Guide for Military

  • Your taxes are the last thing that you need to worry about while serving your country. Not only does Liberty Tax thank our military members and their families, but we are committed to providing a worry and stress-free tax experience. Let us answer all of your questions concerning your tax return.

      

    ACTIVE DUTY 

    For federal tax purposes, “active duty” refers to officers and enlisted personnel in regular and reserve units controlled by the Secretaries of Defense, the Army, Navy, Air Force, and Coast Guard. Members of the U.S. Merchant Marine or American Red Cross are not included (special rules apply to these organizations). If you are on active duty outside of the U.S., you are considered to have lived in the U.S. for tax purposes. 

    Taxable Military Income

    The following must be used to calculate your gross income, with the exclusion of pay in a combat zone.

    BASIC PAY
    • Active duty
    • Attendance at a designated service school
    • Back wages
    • Drills
    • Reserve training
    • Training duty
    SPECIAL PAY
    • Aviation career incentives
    • Diving duty
    • Foreign duty (outside the 48 contiguous states and the District of Columbia)
    • Hostile fire or imminent danger
    • Medical and dental officers
    • Nuclear-qualified officers
    • Special duty assignment pay
    BONUSES
    • Enlistment
    • Reenlistment
    OTHER PAYMENTS
    • Accrued leave
    • Personal money allowances paid to high-ranking officers
    • Student loan repayment from certain programs (when a full year of service is not attributable to a combat zone)

     

    Nontaxable Military Income

    The following are excluded from gross income and are not taxed.  

    HOUSING ALLOWANCES
    • BAH (Basic Allowance for Housing) – [NOTE: you can deduct the mortgage interest and real estate taxes paid on your home even if you pay these expenses with your BAH]
    • BAS (Basic Allowance for Subsistence)
    • Housing and living allowances abroad paid for by the government
    • OHA (Overseas Housing Allowance)
    FAMILY ALLOWANCES
    • Certain educational expenses for dependents
    • Emergencies
    • Evacuation to a place of safety
    • Separation
    DEATH ALLOWANCES
    • Burial services
    • Death gratuity payments to eligible survivors
    • Travel of dependents to burial site
    MOVING ALLOWANCES
    • Dislocation
    • Military base realignment and closure benefit
    • Moving household and personal items
    • Moving trailers or mobile homes
    • Storage
    • Temporary lodging and temporary lodging expenses
    HEALTH EXPENSES
    • Medical/dental care
    • Defense counseling
    • Disability, including payments received for injuries incurred as a direct result of a terrorist or military action
    • Group-term life insurance
    TRAVEL ALLOWANCES
    • Annual round trip for dependent students
    • Leave between consecutive overseas tours
    • Reassignment in a dependent restricted status
    • Transportation for you and your dependents during ship overhaul or inactivation
    • Per diem
    EDUCATION ALLOWANCES
    • Certain educational expenses for dependents
    • Professional education
    • ROTC educational and subsistence allowances
    OTHER EXCLUSIONS
    • Survivor and retirement protection plan premiums
    • Uniform allowances
    • Uniforms furnished to enlisted personnel
    • Legal assistance
    • Space-available travel on government aircraft
    • Commissary/exchange discount

     

    Combat Pay

    For military members serving in a combat zone, certain pay is excluded from being taxed (Social Security and Medicare withholding still apply), such as:

    • active duty pay earned in any month you served in a combat zone
    • imminent danger/hostile fire pay
    • reenlistment bonuses if the voluntary extension or reenlistment occurs in a month you served in a combat zone
    • pay for accrued leave earned in any month you served in a combat zone
    • pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and any other non-appropriated fund activities while serving in a combat zone
    • awards for suggestions, inventions or scientific achievements you are entitled to because of a submission you made in a month you served in a combat zone
    • student loan repayments that are attributable to your period of service in a combat zone (provided a full year’s service is performed to earn the repayment)

     

    Since combat pay is tax-free, you do not have to report it as income for Earned Income Credit (EIC). You and your spouse may both elect to include combat pay in earned income if it decreases your tax liability and may give you a larger refund when calculating EIC. Your combat pay can be found on your W-2, in box 12, with code Q.

    The following applies if you choose to include combat pay as earned income:

    • you can include all your combat pay and your spouse can choose zero
    • you can include zero and your spouse can choose to include all of their combat pay
    • you both can include your combat pay
    • you both can choose not to include your combat pay  

     

    A list of combat zones are listed on the IRS website. See our EIC Tax Guide for more information on the Earned Income Tax Credit. Publication 596 has more examples of nontaxable combat pay.

     

    Special Exceptions

    A tax break when selling your home. The 5-year period used in determining whether you can exclude gain from the sale of your main home may be suspended during the time you, or your spouse, served on qualified official extended duty as a member of the Armed Forces. The suspended time cannot exceed a total of 10 years.    

    Contributing to a retirement plan. Military members who have served in a combat zone can make contributions to an IRA even if the compensation on which the contribution is based is excluded from gross income.    

    Signing of a tax return. Generally, you must sign your tax return before it can be submitted or mailed. However, if you are overseas or incapacitated, you can grant a POA, or power of attorney to an individual to file and sign your return. A specific power of attorney can be done through your legal office or granted by filing Form 2848, Power of Attorney and Declaration of Representative   

    Filing for an extension. Qualifying individuals serving in, or hospitalized from serving in, a combat zone on the filing deadline have an automatic 180-day extension for filing their return, paying any tax due and filing a claim for refund. This extension starts on the last day present in the combat zone or date of hospitalization because of injury from service in the combat zone. 

    Military members not serving in a combat zone but stationed outside the U.S. and Puerto Rico are allowed an automatic 2-month extension for filing. You can also file for an automatic 6 month extension before the filing deadline. You will be charged interest on any taxes due and not paid by the normal due date.

    VETERANS  

    There are special tax rules that apply to those who have served in the Armed Forces but are no longer considered active duty. 

    Retirement Pay

    Military retirement pay, with the exclusion of disability pay, is taxable and must be included when filing your tax return. Taxes are automatically withheld when funds are disbursed to you. Any contributions made to the Survivors Benefit Plan (SBP) are not included in taxable income. Each year, you will receive a Form 1099-R from Defense Finance and Accounting Services that shows the taxable portion of retired pay that is received. This information must be used to accurately compute your taxes.    

     

    Veterans’ Benefits

    Benefits received as a veteran or family member are not taxable and include:

    • disability compensation and pension payments for disabilities paid either to veterans or their families,
    • grants for homes designed for wheelchair living,
    • grants for motor vehicles for veterans who lost their sight or the use of their limbs,
    • benefits under a dependent-care assistance program,
    • education, training, and subsistence allowances,
    • veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death,
    • interest on insurance dividends left on deposit with the VA,
    • death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001,
    • payments made under the compensated work therapy program, or
    • any bonus payment by a state or political subdivision because of service in a combat zone  

    Refer to our Tax Glossary for a complete list of definitions and explanations of commonly used tax terms.

    Updated for 2014 Tax Year