Special Tax Considerations for Members of the Armed Forces

Memorial Day is this coming Monday. It may be the unofficial kick off to summer, but, more importantly, it’s a time to remember those who made the ultimate sacrifice for our nation. So, take the time this weekend to remember the servicemen and women who gave their all.

For those who currently serve our country, there are some special tax considerations that can help them save money come tax time. These include:

Taxable Income for Military Personnel

Members of the United States Armed Forces receive many different types of pay and allowances including; active duty pay, special duty pay, hazardous duty pay, incentive pay, reserve training pay, and bonuses.

Moving Expenses

Members of the Armed Forces do not have to meet the usual time and distance tests to deduct moving expenses if they move because of permanent change of station, which includes:

  • A move from home to first post of active duty
  • A move from one permanent post of duty to another
  • A move from last post of duty to home or to a nearer point in the United States.

If you are the surviving spouse or dependent of a deceased member of the Armed Forces, a permanent change of station includes a move to:

  • The member’s place of enlistment or induction
  • Your, or the member’s, home of record
  • A move from last post of duty to home or to a nearer point in the United States
Combat Pay

If a member of the United States Armed Forces is serving in a combat zone, some pay may be excluded from income. Examples of excludable income include active duty pay earned in the month served in a combat zone, imminent danger/hostile fire pay, and a re-enlistment bonus if the re-enlistment occurs in the month you serve in a combat zone. Non-military individuals working in a combat zone, such as civil service employees and members or the Merchant Marines, do not qualify for the tax-exempt combat pay exclusion.

Exclusion of Gain from a Home Sale

Generally, a taxpayer must have owned and lived in their home as a principal residence for two years of the five-year period ending on the date of sale of the home (ownership and use tests) to be able to exclude $250,000 of the gain ($500,000 if Married Filing Jointly). However, those serving on qualified official extended duty in the military can elect to suspend the five-year test period ending on the date of sale of the principal place of residence for up to 10 years.

Retirement Contributions

According to the IRS, Armed Forces members (including reservists on active duty for more than 90 days during the year) are considered covered by an employer-maintained retirement plan. Service members who are in a combat zone during the year should include their nontaxable combat pay when determining earned income limits for making deductible contributions to a traditional IRA or for making contributions to a Roth IRA. In addition, servicemembers in a combat zone during the tax filing period may have additional time to make an IRA contribution.

Uniform Expenses

Generally, these are not deductible, except when regulations prohibit a servicemember from wearing uniforms off duty. In this case, the unreimbursed cost and expense of upkeep of the uniforms can be deducted including:

  • Military dress uniforms and utility uniforms that cannot be worn when off duty
  • Uniform accoutrements such as insignia of rank, epaulets, and swords
  • Reservists’ uniforms if they can only be worn while performing reservist duties

The additional tax deductions and credits listed above may seem to make taxes more confusing, but they're a result of creating much needed benefits to our military members. So, for those of you in the armed forces, be sure take advantage of these tax deductions, credits and other benefits as they are yours and you have worked the hardest to earn them for all of us.