While no one enjoys paying taxes, there are tax breaks that may make the process a little less painful for servicemembers. If you’re in the military, you could save hundreds of dollars on taxes by knowing these 8 things before you file.
- 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.
- Moving expenses are deductible. If you were required to make a permanent change of station, 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 to get to your new home.
- You and your spouse can choose in which state you’ll be taxed. If you’re Active Duty and you (and your spouse) are relocated, you can choose to be taxed in your state of legal residence, so you don’t have to pay taxes in more than one state. That might mean big savings if it’s a state with no income tax or one with a lower income tax rate than the one where you live. Or, if you’re a civilian spouse of an Active Duty servicemember, you can choose to have the same tax residence as your spouse.
No Income Tax States
- South Dakota
- 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 in a state 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.
- 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.
- You can extend your tax deadline. Keep in mind that an extension to file a tax return doesn't extend the time you have to pay your tax, with the exception of those serving in a combat zone (if you meet the criteria).
You can postpone filing your tax return if:
- you file a regular automatic extension request (if you apply before the due date)
- you’re stationed outside the U.S. and Puerto Rico (you qualify for an automatic 2-month extension for U.S. citizens abroad)
- you’re stationed in a combat zone or serving in a contingency operation, so you’re eligible for a related automatic extension. This also applies if you’re hospitalized outside the U.S. because of injuries received during hazardous duty or in a combat zone.
- 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. All taxpayers are allowed to exclude a percentage of their profit. This applies if, during the 5-year period before you sell your home, it was your primary residence for at least 2 years.
Additional military 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), as long as 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.
- 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 immediately so your withdrawals will be tax-free, provided 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.* What you may not realize is 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. It’s like a double tax break!
Ready to file your tax return? As a servicemember, you’re eligible for free tax preparation and filing services on military bases, or you can use free online tax preparation and e-filing software provided by the U.S. Department of Defense.
Especially for Active Duty Servicemembers and Their Families
If you’re interested in more information on legal and financial protections especially for military members, tips and resources for getting ready for deployment, relocation and separation, visit Navy Federal Credit Union’s Military Life page.
*Premature withdrawals from an IRA will be taxed at ordinary income tax rates and are subject to a 10% IRS penalty.