What Do You Know About Military Tax Breaks?

No one enjoys paying taxes, but there are some tax breaks that may improve the process for servicemembers. If you’re in the military, you could save money on taxes by knowing these 7 things before you file.

1. The tax benefits may change.

Since tax benefits for military members can change from year to year, make sure you have the most current information. This will help you know exactly what you'll need to pay. 

2. Moving expenses are deductible.

If you were required to make a permanent change of station (PCS), you can deduct reasonable unreimbursed expenses for relocating yourself and your family. Some of these may include a trailer rental, packing and shipping costs, and travel expenses like lodging (not meals), car expenses (either actual fuel costs or standard mileage rate) and airfare.

3. You and your spouse can choose which state you’ll be taxed in.

If you’re an Active Duty servicemember and you and your spouse are relocated, you can choose to be taxed only in your state of legal residence. That might mean big savings if it’s a state with no income tax or has a lower income tax rate than the state where you live now. If you’re a civilian spouse of an Active Duty servicemember, you can choose to have the same tax residence as your spouse. 

The following states have no income tax:

• Alaska
• Florida
• Nevada
• New Hampshire*
• South Dakota
• Tennessee*
• Texas 
• Washington
• Wyoming

* Note: New Hampshire and Tennessee do still tax some investment and dividend income.

Homestead exemptions

Depending on where you live, you may be eligible for a homestead exemption. Certain localities will exempt you from paying their taxes if you’re living somewhere that isn’t your state of residence. Your resident state may also give you a credit for the taxes you pay to another state. Check with the state or local tax authority to see what’s available.

4. You probably won’t have to pay tax on combat pay.

Enlisted members, warrant officers and commissioned warrant officers can exclude their basic pay, reenlistment bonus and more if during the tax year they served in a combat zone or qualified hazardous duty area designated by Congress. Commissioned officers (other than commissioned warrant officers) can also exclude part of their combat pay. Check the military tax guide for details.

5. You can extend your tax deadline.

You can postpone filing your tax return under the following scenarios:

 

• If you file a regular automatic extension request (if you apply before the due date).
• If you’re stationed outside the US and Puerto Rico (you qualify for an automatic 2-month extension for US citizens abroad).
• If you’re stationed in a combat zone or serving in a contingency operation, you’re eligible for a related automatic extension. This also applies if you’re hospitalized outside the US because of injuries received during hazardous duty or in a combat zone. 

An extension to file a tax return doesn’t extend the time you have to pay your tax. The exception is those serving in a combat zone (if you meet the criteria). 

6. You may not have to include capital gains tax on the sale of your home.

Under normal circumstances, you pay a tax on the sale of your house if you sell it for more than you paid. Taxpayers are allowed an exclusion of up to $250,000 of profit ($500,000 for married couples filing jointly). This applies if your home was your primary residence for at least 2 years during the 5-year period before you sold it.

Additional military tax benefit

If you or your spouse serve on qualified official extended duty in the U.S. Armed Services or the Foreign Service and are away from your property, you can extend the 5-year rule by 10 additional years (or 15 years total), if it was your primary residence for at least 2 of the 15 years. 

Check the IRS’ publications—Selling Your Home or the Armed Forces’ Tax Guide—for more detailed information.

7. You may be able to contribute to and withdraw from a Roth IRA tax-free.

Typically, when you contribute to a Roth IRA, you pay taxes upfront so your withdrawals will be tax-free, if you meet certain conditions. Some of these conditions are (a) you’ve owned the account for at least 5 years and (b) you’re at least age 59½ when you begin to withdraw.^{Footnote 1} If you’re receiving tax-free combat-zone pay and use those funds to contribute to your Roth IRA, you also won’t pay taxes when you withdraw those funds.

Ready to file your tax return? As a servicemember, you’re eligible for free tax preparation and filing services on military bases. You also can use MilTax, the Department of Defense’s free tax preparation and filing software designed for military members and their families. 

Tax information for Active Duty servicemembers and their families

If you want to learn more about legal and financial protections for military members, plus tips and resources for getting ready for deployment, relocation and separation, be sure to explore Navy Federal Credit Union’s military life resources.