As a member or veteran of the United States military, there are some tax rules, benefits and planning techniques that you, your loved ones, and your tax preparer should be aware of. Below are 7 guidelines, however the complete list of tax benefits exclusive to military pay is much longer.
Military Pay & Deductions
The US government heavily incentives military pay by means of non-taxable pay and allowances such as combat pay, housing allowances, clothing allowances, cost of living allowances and food allowances. Generally, only base pay and certain bonuses are subject to taxation.
There are also many military specific tax deductions that are available to service members that are not available to ordinary taxpayers. These include moving expenses, travel, uniforms, and haircuts to name a few.
Retirement Planning with Combat Pay
Although combat pay is not subject to income tax it is still considered earned income. There are some special planning techniques that can be used to maximize this benefit. One major benefit is using your tax-free combat pay to contribute to a Roth IRA. This is a powerful retirement planning benefit because it allows you to contribute tax free income to your Roth, experience tax free growth within the Roth, and take tax free distributions upon retirement. Another benefit is to elect to include combat pay in Earned Income Credit calculations to maximize the credit.
VA Benefits & Military Retirement
After separation from the US military, most veterans and retirees will continue to receive benefits from the VA for years to come. VA disability and education benefits (GI Bill) are tax free, and do not need to be reported to the IRS. US military retirement pay however is taxable and should be reported. Typically, DFAS will provide you with a 1099-R detailing the amounts that need to be reported.
Military Severance Pay
Military severance pay is also normally considered taxable. The exception is if the severance pay is related to a service connected disability. In this situation, you will still report the severance to the IRS as nontaxable income. If you pay taxes on military severance pay, but later receive a disability rating from the VA, you may be entitled to amend your taxes and receive a refund.
Service members stationed overseas or deployed are eligible for filing extensions. The rules vary, however deployed service members are granted at least 180 after they return from a deployment to file and pay tax returns that would have been due during the period in which they were deployed. These extensions may also be available for qualified hospitalization that is a result of injuries incurred while in combat.
Tax Forgiveness if Killed in Action
If a service member “dies while in active service in a combat zone, or at any place from wounds, disease, or injury incurred while in active service in a combat zone (Pub. 3)” the service members prior unpaid taxes, taxes in the year of death, and possibly previous years taxes will be forgiven.
Levy/Garnishment of Wages
While military pay has its benefits, it is not without its downsides. The Federal Payment Levy Program (FPLP) allows the IRS to levy 15% of Federal payments made through the Bureau of Fiscal Service. These payments include military pay, and military retirement amongst others.
The list of tax benefits and rules for treatment of military pay is long and can seem overwhelming. If you feel that one of these situations may apply to you, you may benefit by consulting a tax professional. Our staff at Precision Tax Relief have a long track record of helping clients with their tax related issues. We would love to get to know you and earn your business.
Publication 3-Armed Forces Tax Guide. (2018, February 20). Retrieved October 18, 2018, from https://www.irs.gov/pub/irs-pdf/p3.pdf