Tax breaks for military families and how to navigate them

[UNITED STATES] Military families make tremendous sacrifices for our country, and the tax code recognizes some of those sacrifices by offering various tax breaks. However, these tax breaks come with a set of complex rules that can be difficult to navigate, even for the most seasoned tax professionals. Understanding these tax breaks and the nuances of military tax law can help service members and their families maximize their savings.

Key Tax Breaks for Military Families

The federal government provides several tax breaks specifically for military families. These tax incentives can offer relief during deployment, moving, and other life events that come with military service. Some of the most notable tax breaks include:

1. Combat Pay Exclusion

One of the biggest tax breaks for military service members is the exclusion of combat pay from taxable income. For service members who are deployed in a combat zone, the income they earn is not subject to federal income tax.

Combat pay is typically not taxed when a service member serves in designated combat zones such as Afghanistan or Iraq. This exclusion can result in significant tax savings, especially for those in active-duty service. However, while combat pay is exempt from federal income tax, it is still considered when calculating other benefits, such as Social Security and Medicare contributions.

2. Military Spouse Residency Relief Act (MSRRA)

The MSRRA offers special provisions for military spouses who may otherwise face state taxes due to moving frequently. Under this law, military spouses are generally not required to pay state income taxes in a state they have moved to for the service member’s duty. Instead, they can continue to pay state taxes in their home state, even if they live in a different state due to military relocation.

This law is particularly important because it can save military families from facing double taxation if both spouses work and live in different states.

3. Moving Expense Deductions (for Active Duty Military)

While moving expenses are no longer deductible for most taxpayers under the Tax Cuts and Jobs Act (TCJA), there is still an exception for active-duty military personnel. Service members can deduct the costs associated with relocating due to a permanent change of station (PCS). This includes costs for transportation, lodging, and storage.

4. Deductions for Uniforms

Unlike many other professions, military personnel can deduct the cost of uniforms if they are required to purchase them and cannot be worn for civilian purposes. This is a small but helpful break that can ease the financial burden of maintaining the wardrobe required for military service.

5. Special Tax Filing Extensions

Military personnel who are stationed overseas or deployed in combat zones are eligible for tax filing extensions. This means they don’t have to worry about filing their taxes on the usual April 15 deadline. The extension may last up to 180 days after they leave the combat zone, allowing service members to file their taxes when they return home.

Additionally, if a service member is injured while serving in a combat zone, they may qualify for further extensions to file their taxes.

Challenges and Complications

While these tax breaks can be incredibly beneficial, they come with a number of complexities. Many of these benefits have specific requirements and deadlines that can be challenging to track.

Combat Pay and State Taxes

While combat pay is exempt from federal income taxes, some states tax combat pay. “Tax laws vary by state, and it’s critical for military families to know how their state handles combat pay,” says tax expert Jennifer S. Johnson. “Some states don’t follow federal guidelines, so it’s important to seek professional advice to avoid surprises during tax season.”

Understanding how combat pay is treated in your state of residence can prevent unpleasant surprises and ensure you receive the correct exemptions.

The Complexity of Military Spouse Tax Rules

The Military Spouse Residency Relief Act (MSRRA) is a great benefit for many, but it’s important to note that the rules can be tricky. The law only applies if the military spouse is living in the state because of the service member’s military orders. If a spouse works remotely or in a state that doesn’t recognize the MSRRA, they may still be subject to state income taxes.

“This law is meant to ease the tax burden on military families, but there are still nuances to it. Not all states are on the same page when it comes to residency issues, so military families should be prepared to do their research or consult a tax professional,” says financial advisor Rachel Brooks.

The Tax Treatment of Moving Expenses

Military families are often on the move, and one of the unique tax breaks they enjoy is the ability to deduct moving expenses. However, this benefit only applies to active-duty service members, and there are very specific rules on what can be deducted.

The TCJA eliminated the moving expense deduction for most taxpayers, but military personnel can still claim it if they are moving due to a PCS order. “If you are active-duty military and your move is part of your job requirements, you can take advantage of this deduction. But, it is important to keep accurate records of the moving expenses you incur,” notes tax expert William Harris.

Navigating the Rules for Uniform Deductions

The uniform deduction is another benefit that seems straightforward but requires some careful attention. Service members can only deduct the cost of uniforms they are required to buy and cannot be worn outside of military duties. This includes uniforms, accessories, and cleaning expenses.

However, the IRS has specific guidelines on which items qualify for the deduction. Service members cannot deduct the cost of items like civilian clothing, and they must be able to prove that their uniforms are not suitable for civilian use.

Filing Extensions and Deadlines

While service members in combat zones enjoy extended filing deadlines, they still need to be aware of the rules surrounding extensions. The extension applies automatically when you’re in a combat zone, but it is still important to keep track of the deadline. Missing the deadline could lead to penalties and interest charges, which could diminish any savings from the extended filing period.

Tax experts often recommend that military families file their taxes as soon as possible, even with the extension, to avoid complications and ensure they get any refunds as quickly as possible.

Expert Tips for Military Families Filing Taxes

Start Early: Military families should begin tax preparation well ahead of the deadline to ensure they are taking full advantage of their tax breaks.

Consult a Tax Professional: Given the complexity of military tax benefits, working with a tax professional who is familiar with the unique tax breaks available to military families is highly recommended.

Track Your Moves: Keep detailed records of your PCS orders, travel expenses, and any costs related to moving. This documentation will be critical for deductions.

Double-Check Your Combat Pay Status: Ensure you understand whether or not your combat pay is taxable based on where you live.

Know Your State's Tax Laws: States treat military income differently, so it's important to understand the specific rules in your state to avoid errors.

Military families have access to a variety of tax benefits, but the rules surrounding these benefits can be tricky. From combat pay exclusions to special filing extensions, understanding the tax code is crucial for maximizing these breaks. Experts agree that consulting with a tax professional is one of the best ways to ensure that service members and their families are receiving all the benefits available to them.

As always, staying organized and proactive can help military families navigate the complexities of the tax system and make the most of the financial benefits that come with serving our country.