Tax time can be stressful for anyone. Even if you’re looking forward to getting a refund, there’s paperwork to find and fill out, and the dreaded possibility of an audit. Military members may have even more complex situations to deal with, but there are also some benefits that can help you file your return and even save you money.
Below, we highlight some of the most important points to keep in mind for the upcoming tax season. If you’re interested in reading more about military-related tax rules, the Internal Revenue Service (IRS) maintains IRS Publication 3, the Armed Forces’ Tax Guide, and a page with links to information for military members.
Extensions on filing and paying taxes. If you’re serving in a combat zone, you may receive an extension for when you have to file your tax return, pay taxes, or take other actions with the IRS (such as responding to some audits). The extension is for up to 180 days after the last day you were in a combat zone, contingency operation, had a qualifying service outside of the combat zone, or were in continuous hospitalization due to an injury you received during one of those three circumstances.
Keep in mind, if you delay filing your tax return and you’re owed a refund, you also won’t receive the refund until you file.
Don’t pay income taxes on every type of pay. Eligible military members who served in a designated combat zone may be able to exclude some of their pay from income taxes. This could include your basic pay, a reenlistment bonus, school loan repayments, discharge benefits, hostile fire pay, and other incentives.
You can only exclude all eligible pay that you received during a month as long as you were in the combat zone for a single day during that month. Military pay that you earn while hospitalized due to a disease, injury, or wound you received while in a combat zone can also be excluded for up to two years.
The exclusion only applies to income taxes – you could still have to pay Social Security and Medicare taxes, the income will be on your W-2, and you’ll have to include it on your tax return.
However, you can choose to count all of your combat pay as earned income for the Earned Income Tax Credit (EITC) if you want. Doing so could lower your taxes owed, or even result in a larger refund. Test both scenarios to see which one is best for your circumstances.
Choose your state of residency. Many military members will move multiple times during their service. However, moving can cause extra work during tax time as you may have to file two (or more) part-year resident state tax returns.
As a military member, your State of Legal Residency (SLR) — the state you’re a resident of for tax purposes — is your Home of Record, the state that you lived in when you enlisted, were commissioned, inducted, appointed, or began a tour of active duty. However, if you’re stationed in a different state, you may be able to change your SLR by filing DD Form 2058 with your local finance officer.
Choosing an SLR that doesn’t have state income taxes, has a low income-tax rate, or excludes part of your military income from state taxes could save you money each year.
But you can’t just choose a new state if you’re temporarily stationed there, you must intend to live in the state after retiring. You also may want to register to vote, get a driver’s license, and pay to register your vehicle in the state.
Deduct non-reimbursed moving expenses. There’s another tax-related break that can make a move less costly. You may be able to deduct unreimbursed moving expenses, which can lower your taxes. Plus, members of the Armed Forces who are on active duty and must move due to a permanent change of station don’t have to meet the distance or time test that can otherwise apply.
Get free help with your taxes. Many military installments offer free tax preparation and filing through the IRS’s Volunteer Income Tax Assistance Program (VITA). The volunteers receive special training that emphasizes many of the common tax issues discussed above, such as moving expenses and combat pay.
Alternatively, if you’re comfortable filing on your own, tax software makers may offer free use of their tax preparation software to active duty military members and their families.