I'm guessing that many people, civilian and military alike, didn't know that March 13 is the official birthday of the United States Army K-9 Corps, which began in 1942. Many states have actually adopted K-9 Veteran's Appreciation Day so this not only makes for good time to recognize our K-9 vets, and their handlers, but it's the perfect opportunity to remind you about some of the tax benefits available to our military folks. There are a number of considerations to take into account regarding military personnel's taxes and most of them result in a bigger, and well deserved, tax refund; however, some are complicated and take some strategizing to use to your advantage.
Active duty members and activated Reservists who spend time in a combat zone may be able to take advantage of benefits relating to combat pay and certain child related tax benefits. Combat pay, which includes the member's base pay and consists of various types of pay including; imminent danger and hostile fire pay, hazardous duty pay, and even re-enlistment bonuses, received during the time in a combat zone is tax-exempt (aka tax-free). This income is not subject to income tax, but is subject to Social Security and Medicare taxes. The "tax-free" time is each month, or part of a month, the member is in a declared combat zone.
The part of the month stipulation can be very beneficial. For example, say Chris was deployed to Afghanistan last year. He arrived in the combat zone the last day of March and left the zone October 1. Since Chris was in the combat zone for a part of eight different months, eight full months of his pay is tax-free even though it was only one day during the first and last month of his deployment.
In addition, service members can choose to add their combat pay to their earned income to determine their Earned Income Credit (EIC) amount. Simply put, Chris, who is married with two children, made $46,764 last year; his combat pay is $31,776 so his total taxable pay is $14,988. Chris is eligible for $5,548 when he calculates his EIC using the taxable income of $14,988, but only $674 when using his total income. Chris will use his taxable income only when calculating his EIC, this way he qualifies for the larger credit, but doesn't increase his income tax.
Another tax benefit available to military members relates to the 50-mile minimum distance rule for moving expenses. If a service member is under permanent change of station orders and they move, the 50-mile minimum distance rule is not applied. This allows those who get orders to the same, or a close location, to move into a new house in the same town and deduct all allowed costs. Therefore, if you are on active duty, buying a house, and due for orders, the best tax strategy is to wait to move until you get your permanent change of station (PCS) orders, then you will be able to claim your moving expenses even if you are only moving two houses down.
There are many considerations for the military, including rules for travel related expenses, employer-provided military differential pay, and extensions of time to file, making for a complex tax situation where it becomes easy to leave money on the table. The IRS offers various resources on the Tax Information for Members of the Military page on the IRS website, but if you aren't sure how to handle a specific situation or are concerned about taking advantage of all the benefits to optimize your tax situations, find a good tax pro. Make sure to hire someone that understands all the issues associated with the specialized rules of military service. Ask some questions to make sure you have someone who gets you the biggest tax refund you deserve and will help you out should any other tax issues come up.
Military Service is possibly one of the most important life choices a person can make and it counts as a critical "life-event" when it comes to taxes. Even though the tax benefits might be complicated to figure out, they are available for a reason and can mean more money in your pocket.