For federal tax purposes, the United States Armed Forces includes commissioned officers, warrant officers, and enlisted personnel in all regular and reserve units under control of the Secretaries of the Defense, Army, Navy, and Air Force. The United States Armed Forces also includes the Coast Guard, but it does not include members of the United States Merchant Marine or the American Red Cross. As a member of the United States Armed Forces, special tax considerations are given for the following items:
- Taxable Income for Military Personnel
- Nontaxable Items
- Moving Expenses
- Combat Pay
- Exclusion of Gain from a Home Sale
- Overnight Travel Expenses of National Guard and Reserve Members
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Taxable Income for Military Personnel
Members of the United States Armed Forces receive many different types of pay and allowances. Some are included in gross income whereas others are excluded from gross income.
The following items are subject to tax and must be reported on your tax return unless the pay is for service in a combat zone as designated by the president of the United States:
- Active duty pay
- Special pay, such as aviation, diving, foreign duty, hardship duty, hostile fire or imminent danger, overseas extension, special duty assignment, etc.
- Reserve training pay
- Bonuses, such as enlistment, re-enlistment, career status, officer, overseas extension
- Armed Services academy pay
- Accrued leave or mustering-out payments
- Lump-sum payments made upon separation or release
- Student loan repayments
- Incentive pay, such as submarine, flight, hazardous duty, high altitude/low altitude
Certain pay and allowances that members of the United States Armed Forces receive may be excluded from income, such as:
- Pay for active service while in a combat zone or a qualified hazardous duty area
- Living allowances, such as BAH (Basic Allowance for Housing), BAS (Basic Allowance for Subsistence), and OHA (Overseas Housing Allowance)
- Disability benefits
- Medical benefits
- Educational assistance
- Legal assistance
- Family separation allowances
- Temporary lodging for certain orders
- Uniform allowances
- Moving allowances
Some excluded income items may have to be used to calculate certain tax benefits on your tax return even though they are not subject to tax. For example, excluded combat pay is included in income for purposes of calculating the Additional Child Tax Credit as discussed in the Combat Pay section.
As a member of the Armed Forces, if you move because of permanent change of station, you do not have to meet the usual time and distance tests to deduct moving expenses. A permanent change of station includes:
- A move from your home to your first post of active duty
- A move from one permanent post of duty to another
- A move from your last post of duty to your home or to a nearer point in the United States. The move must occur within one year of ending your active duty or within the period allowed under the Joint Federal Travel Regulations.
If the military moves your spouse and dependents to or from a different location than your location, the moves are treated as a single move to your new main job location.
Certain items provided by the government because of a permanent change of station are not included in your income, such as:
- The value of moving and storage services
- Dislocation allowance
- Temporary lodging expense
- Temporary lodging allowance
- Move-in housing allowance
Generally, if the total reimbursements or allowances that you receive from the government are more than your actual moving expenses, the excess is included in your wages on Form W-2, Wage and Tax Statement.
However, some reimbursements or allowances (other than dislocation, temporary lodging, temporary lodging expense, or move-in housing allowances) that exceed the cost of moving may not have been included in your Form W-2. This excess must also be included in your gross income.
Moving allowances you receive as a military base realignment and closure benefit may be excluded from income. Generally, payments under the Homeowners Assistance Program (HAP) made after November 11, 2003 are excluded from income.
However, the excludable amount cannot be more than 95% of the fair market value of the property for which the payments were made, as determined by the Secretary of Defense before public announcement of intent to close all or part of the military base or installation, minus the fair market value of the property as determined by the Secretary of Defense at the time of sale.
Any part of the payment that is more than this limit is included in income.
You can deduct reasonable unreimbursed moving expenses for moving household goods and personal effects and reasonable travel and lodging expenses. Use Form 3903, Moving Expenses, to deduct these unreimbursed expenses, including the qualified expenses that exceed your reimbursements and allowances.
If you are a member of the United States Armed Forces serving in a combat zone, some of your pay may be excluded from income. Even if you only serve for one day out of the month in a combat zone, the entire exclusion for that month is allowed. Examples of excludable income include active duty pay earned in the month you 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.
A combat zone is an area that the President of the United States designates by Executive Order to be an area in which the United States Armed Forces are engaging or have engaged in combat. Members serving in a qualified hazardous duty area designated by statute have the same benefits as members serving in a combat zone designated by Executive Order of the president. The wages shown in your Form W-2, Wage and Tax Statement, Box 1 should not include military pay excluded from your income under the special combat zone exclusion provisions. If it does, you will need to obtain a corrected Form W-2 from your finance office. You cannot exclude as combat pay any wages shown in Form W-2, Box 1.
See irs.gov for a complete listing of designated combat zones.
Generally,military service outside a combat zone is considered to be performed in a combat zone if the service qualified you for special military pay for duty subject to hostile fire or imminent danger.
None of the following types of military service qualify as service in a combat zone:
- Presence in a combat zone while on leave from a duty station located outside the combat zone
- Passage over or through a combat zone during a trip between two points that are outside a combat zone
- Presence in a combat zone solely for your personal convenience
You may elect to include combat pay in your earned income for purposes of calculating certain tax credits. You should determine your EIC and the credit for Child and Dependent Care Expenses both with and without using the combat pay in your calculations. Elect the option for each credit that provides you with the largest amount of credit. Combat pay must be included in income when calculating the Additional Child Tax Credit. This benefit for the EIC and the Additional Child Tax Credit may allow you to claim a refund, even if you have no tax liability or earned income to report on your return.
Note: Including combat pay in calculation of these tax benefits does not make your combat pay taxable. Do not include any previously excluded combat pay in your wages on your tax return.
Generally, you can receive an automatic six-month extension to file your return by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, by the regular due date of your return. However, you can qualify for an automatic extension of time until June 15 without filing Form 4868 if on an assigned tour of duty outside the United States and Puerto Rico during a time that includes the due date of your return. You should attach a statement to the return you file showing that you met the requirements for this automatic extension. If you need more time beyond June 15, you can request an additional four-month extension to October 15. Write "Taxpayer Abroad" across the top of Form 4868 and file Form 4868 by June 15. These extensions are for filing only, not for paying any balance due. Interest will be charged on any tax not paid by April 15.
There is also an automatic extension for filing returns, paying taxes, filing claims for refunds, making timely contributions to an IRA, making estimated tax payments, and taking other actions with the IRS when serving in a combat zone or qualified hazardous duty area. This extension is generally 180 days from the total of the following:
- The date you left the combat zone or hazardous duty area (or the last day the area qualifies as a combat zone or hazardous duty area)
- The number of days remaining before the regular deadline, starting from the date you entered the combat zone or hazardous duty area
If you entered the combat zone before the filing period began, your deadline is extended by the entire filing period.
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, in most cases, if Married Filing Jointly). However, if you were serving on qualified official extended duty in the military, you can elect to suspend (for up to 10 years) the five-year test period ending on the date of sale of your principal place of residence. This means that you may be able to meet the two-year use test even if you did not actually live in your home for at least the required two years during the five-year period ending on the date of sale.
For example, Jose bought and moved into a house in 2006, lived in it as his main home for 2 and one half years, and then did not live in it for the next six years because he was on qualified official extended duty. He sold the home at a gain in 2015. To meet the use test, Jose chose to suspend the five-year test period for the six years of qualifying official extended duty. Therefore, the five-year test period consists of the five years before going on qualifying official extended duty. The ownership and use tests are met because Jose owned and lived in the home for 2 and one half years during this test period.
The period of suspension applies when the duty station is at least 50 miles from the residence (or while the person is residing under orders in government housing) for a period of more than 90 days or for an indefinite period. You cannot suspend the five-year period for more than one property at a time. You can revoke your choice to suspend the five-year period at any time.
If any tax has previously been paid on a home sale that qualifies for this tax relief, an amended return may be filed to claim a refund. Generally, you have three years from the date you filed your original return to file your claim for refund. If you amend a return to use this tax relief, write "Military Family Tax Relief Act" in red across the top of Form 1040X, Amended U.S. Individual Income Tax Return.
If you sell your home due to a move to a new permanent duty station and do not meet the ownership and use tests, you can exclude gain on the sale of your home, but the maximum amount of gain you can exclude will be reduced.
Overnight Travel Expenses of National Guard and Reserve Members
If you are a member of the National Guard or Reserves and must travel away from home to perform your service (for example, for a drill or a meeting) in a location that is more than 100 miles away from your home, you are allowed an adjustment to income on Form 1040 for related travel expenses incurred even if you do not itemize your deductions. Allowable expenses include expenses for overnight lodging, transportation, and meals. The amount of the allowable expenses cannot exceed the federal government daily per diem amounts applicable for that location.
Special tax provisions apply to members of the Armed Forces who:
- Die while serving in a combat zone or die from wounds, disease, or injury incurred while serving in a combat zone
- Die from wounds or injury incurred in a terrorist or military action while a U.S. employee
For deceased military members who served in a combat zone, income tax does not have to be paid for the tax year in which they died or for any earlier year ending on or after the first day the member served in the combat zone in active service. If any of this tax has previously been paid, it will be refunded. Additionally, any unpaid taxes for prior years do not have to be paid, and any prior year taxes paid after the date of death will be refunded.
For example, Priscilla entered a combat zone December 1, 2013 and died in the combat zone March 31, 2015. Income tax does not have to be paid for tax years 2013, 2014, or 2015.
This provision also applies to a member of the Armed Forces serving outside the combat zone if the service was in direct support of military operations in the combat zone, and the service qualified the member for special military pay for duty subject to hostile fire or imminent danger.
The date of death for a member of the Armed Forces who was in a missing status (missing in action or prisoner of war) is the date their name is removed from missing status for military pay purposes, even if death actually occurred earlier.
For military U.S. employees who die from wounds or injury incurred while U.S. employees in a terrorist or military action, income tax does not have to be paid for the tax year in which they died or for any earlier year beginning with the year before the year the wounds or injury occurred. For example, Martin died in 2015 of wounds incurred in a terrorist attack in 2009. Income tax does not have to be paid for 2008, 2009, 2010, 2011, 2012, 2013, 2014, or 2015. Refunds are allowed for the tax years for which the period for filing a claim for refund has not ended.
The death gratuity is a one-time payment of $100,000 to the surviving family of a deceased military member. For deaths occurring 120 days after retiring, the benefit paid to survivors of a deceased Armed Forces member is $12,420. This entire amount is tax-exempt.
Additional benefits are available through the Servicemen's Group Life Insurance (SGLI) program. The SGLI benefits are also tax-exempt. You may roll over the SGLI or death gratuity payment into a Roth IRA or Coverdell ESA within one year of receiving the payment. The rollover amount is considered part of the account.
For IRA contribution purposes, your compensation includes nontaxable compensation pay. This will allow you to consider all of your pay when determining the amount of eligible contribution.
If you are a reservist who is called to active duty for a period of more than 179 days, you may withdraw funds from your IRA, 401(k), 403(b), or other similar qualified plan, you will be exempt from the 10% additional tax for early withdrawal. The distribution is still subject to income tax.