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Special Tax Considerations for Members of the Military

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Happy Memorial Day! The upcoming long weekend isn't just a time to fire up the grill and kick off summer; it's a time to remember those who made the ultimate sacrifice for our nation. So, take the time this weekend to remember the members of the armed forces who gave their all.

To do my part to thank the members of the United States Military and their families, I'd like to point out some of the special tax considerations that can help save money come tax time. I recognize taxes are not at the top of your to-do list, so consider this: It is never too early to start planning for tax time, so simply print this off and put in your tax folder or wherever you store tax information during the year. If you do not have a current organizing plan, consider this your first step. Print it, get an envelope and start that year-end planning file today.

In any case, here are some tax planning tips for members of the military:

Taxable Income for Military Personnel

Members of the military receive many different types of pay and allowances. Generally, "pay" is considered taxable and "allowances" are considered non-taxable. Taxable pay includes active duty pay, special duty pay, hazardous duty pay, incentive pay, reserve training pay and bonuses.

Combat Pay

If a member of the military 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 reenlistment 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.

Moving Expenses

Members of the military 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 the first post of active duty
  • One permanent post of duty to another
  • The 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 military, 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 place closer to the last post of duty in the United States

Retirement Contributions

Members of the military (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:

  • Uniform accoutrements such as insignia of rank, epaulets and swords
  • Reservists' uniforms if they can only be worn while performing reservist duties

Taxes are complicated and seem to get more so every year. For select groups such as our brave men and women in the military, they can be even more complicated. However, the complications are largely a result of trying to make them more fair and equitable, and many of these complications provide much needed benefits to our military members. Use the tax deductions, credits and other benefits that have been put in place for your unique situation. You have worked the hardest to earn them for all of us.