If you are in the military, you should receive Form W-2, Wage and Tax Statement , which reports your military pay. Some or all of the pay you received for military service in a combat zone may have been excluded from your taxable income. Commissioned officers' excludable compensation is limited to the maximum enlisted amount. The military paymaster should have already calculated this exclusion, and it should not appear on your Form W-2, Box 1. The excluded portion of your pay is exempt from federal income tax, but remains subject to Social Security and Medicare taxes, and is included with Social Security wages on your Form W-2, Box 3 and with your Medicare wages and tips in Box 5. Depending on your state, the excluded pay may be taxable to your state.
If the wages reported on your Form W-2, Box 1 include military pay that should have been excluded from your income under the combat zone exclusion provisions, you must get a corrected Form W-2 from your finance office. You cannot exclude on your return the amount that was incorrectly reported on Form W-2, Box 1 without getting a corrected Form W-2.
You may be able to reduce your taxes by deducting certain unreimbursed expenses related to your employment with the military. Examples of some of the items you may be able to deduct include:
- Professional dues (but not dues paid to an officers' club or a noncommissioned officers' club) and subscriptions to professional journals
- Cost and cleaning of military battle dress uniforms (including rank insignia, medals, accoutrements, epaulets, and swords) and reservists' uniforms if you cannot wear them off duty
- Job-related training
- Moving expenses if on active duty and the move is based on a permanent change of station order (PCS order)
- Travel, meals (with limitations), mileage, and laundry expenses if incurred while traveling away from home (for example, to perform authorized drills and training duty). For military travel deductions, "home" is your permanent duty station and may not necessarily be where you or your family live.
SPECIAL LAWS AND PROVISIONS
Other special tax relief provisions available to members of the Armed Forces and their families include:
- The option to use your nontaxable combat pay to calculate certain credits such as the Additional Child Tax Credit and the credit for Child and Dependent Care Expenses.
- You may also be able to use your nontaxable combat pay to calculate your eligibility to make a contribution to an IRA (and take a deduction and/or credit and receive a refund).
- If you received a military base realignment and closure benefit, the benefit is generally excludable from income.
- Benefits you received under a dependent-care assistance program are nontaxable.
- If you received a death gratuity as a survivor of a member of the Armed Forces who died after September 10, 2001, you may exclude the amount you received from income. You may be able to claim a refund if you paid tax on a death gratuity you received because of a death that occurred after September 10, 2001.
- The five-year period used in determining whether you can exclude gain from the sale of your main home may be suspended during the period you or your spouse served on qualified official extended duty as a member of the Armed Forces. This change applies to any sale of a main home after May 6, 1997; you may be able to claim a refund if you paid tax on a gain from a sale after that date.
- If you received a distribution from a qualified tuition program (QTP) or a Coverdell education savings account (Coverdell ESA), you may not have to pay the 10% additional tax on the part of the distribution that normally would be included in gross income. To qualify, the designated beneficiary must have attended one of the three military academies (U.S. Military Academy at West Point, U.S. Naval Academy at Annapolis, or U.S. Air Force Academy at Colorado Springs), the Coast Guard academy, or the Merchant Marine academy and the distribution must not exceed the costs of advanced education attributable to that attendance.
- Members of the National Guard or Reserve may qualify for an above-the-line deduction for travel expenses when reporting for reserve training/duty over 100 miles from their home.
Income tax liability is forgiven (does not have to be paid) for an active member of the U.S. Armed Forces who dies from wounds, disease or injury received in combat. The tax liability is forgiven for the tax year in which the death occurred. Additionally, tax liability is forgiven for any other year ending on or after the first day the member served on active duty in a combat zone. Any tax liability that qualifies to be forgiven, yet has already been paid, will be refunded. Unpaid taxes for prior years will also be forgiven.
SPECIFIC TAX TIPS
The inclusion of combat pay in the earned income calculation for EIC remains an option for military members. Electing to include the combat pay may allow you to increase your EIC. Alternately, electing the option to exclude combat pay from your earned income calculations may allow you to qualify for EIC. The election offers military members who have nontaxable income due to the combat zone exclusion provision a unique opportunity to determine the highest allowed EIC for their tax situation.