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Recent articles by Jeff Schnepper: • 4 hidden traps in our tax code, 11/9/2004 • Cutting a deal with the IRS has gotten tougher, 10/31/2004 • Don't let a cheatin' spouse stick you with the tax bill, 10/31/2004 More... |
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Related Articles Put tax savings in your wallet now Give and grow rich with charitable deductions Related Resources Befuddled by tax jargon? Check our tax glossary Federal tax forms and publications Related Sites IRS Armed Forces tax information See highlights of the Military Family Tax Relief Act of 2003. Military Combat Zones Armed Forces' Tax Guide (PDF) |
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If you're in our armed forces, the Internal Revenue Service is your friend -- especially for those in combat. If you or your family were involved in the Iraq war, heres what you should know. By Jeff Schnepper Even the feared forces of the Internal Revenue Service stand in shock and awe before our military forces. Congress has shown its respect and appreciation for the troops by providing lots of special tax breaks for military families. Lets look at some of the benefits. Compensation Military personnel serving in combat areas can exclude part or all of their military pay. If youre an enlisted member, warrant officer, or commissioned warrant officer, you can exclude all of your military pay for the month if you spend any time during that month in a combat area. If youre a commissioned officer, the monthly exclusion is capped at the highest enlisted pay, plus any hostile-fire or imminent-danger pay. For 2004, that amount is $6,315.90 (For 2003, the amount was $5,957.70). If both husband and wife are serving in a combat zone, each qualifies for this exclusion. If youre injured in a combat zone and hospitalized, any pay you receive will be excluded for the period of your hospitalization, just as if you were still serving in the combat zone. This exclusion automatically ends two years after the area is terminated as a combat zone. If you accrue any annual leave for time spent in a combat zone and receive any payment for that leave when youre discharged from service, that payment is also excluded. In fact, if you re-enlist while in a combat zone, any re-enlistment bonus is also excluded. Thats true even if you re-enlist early or if you receive that bonus after youve left the combat zone. (An enlisted soldier is paid anywhere from about $12,000 a year to $57,000, plus allowances. Officers go up from there. Bonuses are paid for re-enlistment, for awards and for other reasons.) Military pay attributable to service in combat zones and excluded will not appear as Wages, tips, other compensation on your W-2. Unfortunately, though, such payments are subject to Social Security and Medicare tax. Exclusions Other benefits may also be excluded. Amounts received as a pension or annuity, to the extent they were received for combat-related injury or illness, also are excluded. Armed forces retirement pay is not excluded from federal tax (but may be exempt from state taxation). Disability retirement pay will be excluded to your disability rating. If youre 30% disabled, 30% of the retirement pay will be excluded from taxes. If the disability retirement pay is based on years of service, as well, only the percentage of disability amount will be excluded. Qualified military benefits are also excluded. These benefits include veterans benefits, medical benefits, professional education, moving and storage, group term life insurance, uniform, and survivor and retirement plan premiums. Combat pay is now counted as income when computing the Child Tax Credit and you now have the option of including, or excluding it in figuring the Earned Income Credit. Neither of these provisions changes the exclusion of combat pay from your taxable income. Allowances Allowances for subsistence, quarters, travel and moving furnished to a commissioned officer, chief warrant officer, warrant officer, or to enlisted personnel, are not taxable income. Housing and cost-of-living allowances to cover the excess cost of quarters and subsistence while on permanent duty at a post outside the United States are also tax-free. So, too, are family-separation allowances received on account of overseas assignments. But heres the best part: Even if you receive a tax-free housing allowance, that wont disallow any mortgage interest or real-estate tax deduction youre otherwise eligible to claim on your home. Extensions If youre serving in a combat zone (or your spouse is, and youre filing a joint return), you have an automatic, 180-day extension to file your return and to pay your tax after youve left the zone. If you have been hospitalized as a result of injury or sickness from a combat zone, the automatic extension is 180 days from the day you leave the hospital. These extensions apply regardless of the source of your income. It covers military pay from non-combat areas as well as interest earned, dividends and other income. Death We hope this doesnt happen, but this is something all military families should know. If you die in a combat zone, or from wounds or disease you got in a combat zone, any income tax for the year of death and any prior year ending on or after the first day you served in the combat zone, is canceled. Any unpaid tax for years prior to your service in the combat zone may also be abated. The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001 has been doubled to $12,000, and is all non-taxable. In addition, if youre missing in action, your spouse can still file a joint return up to two years after the end of combat activities in that zone. Examinations Hows this for tax planning? If youre in a combat zone, or are hospitalized as a result of injuries or illness received in a combat zone, the IRS suspends all examination and collection action. This includes all audits, notices, or any collection activities. Miscelleanous If youre a member of the Reserve, you can deduct travel expenses for any period youre more than 100 miles away from home in connection with your reserve duties as an above the line expense allowed even if you take the Standard Deduction. Also, if youre in the Reserve, that counts as a temporary work location. So, you can deduct the expenses of the daily round trip transportation between your home and your reserve station. The 5 year period used in determining whether you can exclude gain on the sale of your home is suspended for any period you or your spouse serves on qualified extended duty. Benefits received under a dependent care assistance program are nontaxable. If youre on active duty, and have a permanent change of station, you dont have to meet any of the time and distance tests for moving deductions. You can keep up with tax assistance for military families by checking out Armed Forces Tax Guide on the Internal Revenue Services Web site. | |||||||||||||||
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