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Tax Planning Tips for Armed Forces Personnel

September 30, 2018

The total U.S. armed forces add up to more than 1.3 million American men and women, according to recent statistics from the Defense Manpower Data Center. Those who serve our country — and their families — should be aware that there are special tax benefits available to them. The Virginia Society of Certified Public Accountants (VSCPA) offers these tips on how to make the most of them.

More Time to File in Some Circumstances

The normal tax deadlines and other tax-related actions are postponed for armed forces members who are actively serving in combat zones (and those serving in support of them). The deadline for taking actions with the U.S. Internal Revenue Service (IRS) is extended for 180 days after the later of the last day you are in a combat zone or the last day of any continuous qualified hospitalization for injury from service in the combat zone. In addition to the 180 days, your deadline is extended by the number of days that were left for you to take the action with the IRS when you entered a combat zone. In an example cited by the IRS, a service person who began serving in a combat zone on March 1 will be given a 226-day extension, after his or her last day in the combat zone, for performing certain actions applicable to his or her taxes, including filing and paying taxes for that year. The extension period will include the 46 days that were left before the April 15th deadline when he or she entered the combat zone (March 1 – April 15), plus 180 days. Extensions, which also generally apply to the service person’s spouse and dependent children, encompass other areas, including qualified retirement contributions to an IRA and estimated tax payments.

Exclusions from Income

If you receive combat pay for serving in a combat zone — or for a month in which your were hospitalized with injury or illness received in a combat zone — that pay will generally be excluded from the wages that are reported on your W-2, which means it is not taxable. Your CPA can provide more details on income exclusions for service members and on combat zones, which are designated by an Executive Order from the president.

Deductions for Service Personnel

As a general rule, taxpayers can only deduct moving expenses if they have a new job that is at least 50 miles farther from their old home than their previous job was (the distance test) and if they work full-time for at least 39 weeks during the first 12 months immediately following their arrival in the general area of the new job location (the time test). Armed forces members on active duty can deduct their unreimbursed moving expenses without meeting either of these tests if they are relocating because of a permanent change of station. Related travel expenses are also deductible. When moving to a foreign country or between foreign countries, service members can also generally deduct the costs of storing their possessions.

Breaks for Reservists

Armed forces reservists may also be able to deduct expenses for overnight travel that takes them more than 100 miles from home while performing their service. They may also be exempted from the 10% IRA early withdrawal penalty if they tap into these accounts to cover hardship costs when they are called up.

Savings and Retirement Options

Members of the armed forces are eligible to participate in the Thrift Savings Plan (TSP), a federal savings and retirement program. Those who contribute amounts from their combat pay into a Roth TSP or Roth IRA are able to maximize their retirement nest eggs, since the combat pay and qualified Roth distributions are both tax-free.

Your CPA Can Help

Your local CPA can offer members of the armed forces and their families reliable answers to questions relating to taxes and any other financial issues. Turn to him or her for help with all your financial concerns.

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