Taxes are one of the certainties of life. However, servicemembers have access to a number of tax advantages that can make taxes less overwhelming. Tax benefits can change year to year, so it’s important to stay up to date.
As you’re preparing to file taxes this year, remember that you can:
- Contribute to and withdraw from a Roth IRA tax-free. Typically, when you contribute to a Roth IRA, you pay taxes immediately and withdrawals are tax-free, provided you meet certain conditions, such as holding the account for at least five years and being at least age 59½ when you start distributions.1 However, if you’re receiving tax-free combat-zone pay, you can contribute to and withdraw from your Roth without being taxed. It’s like a double tax break!
- Exclude combat pay. You can exclude your Basic Pay, your Reenlistment Bonus and more from your taxable income if you were serving in a combat zone at the time. These exclusions apply to enlisted members, warrant officers and commissioned officers, although exclusions are capped at the highest rate of pay.
- Check eligibility for Homestead Exemption. Depending on where you live, you may be available for a Homestead exemption. Check with your county’s tax processor to confirm your eligibility.
- Deduct moving expenses. If you were required to make a permanent change of station, then you can deduct “reasonable unreimbursed expenses” incurred when relocating yourself and your family. Expenses may include trailer rental, packing costs and travel expenses from your old to new home, including lodging (but not meals), car expenses (either actual fuel costs or standard mileage rate) and airfare.
- Choose which state to be taxed for military member and civilian spouses. Active Duty servicemembers who are relocated and their accompanying spouses can choose to keep their prior residence for tax purposes. This can provide big savings if your former residence is in a state with no or lower income tax. Additionally, if you’re the civilian spouse of an Active Duty U.S. military servicemember, you can choose to have the same tax residence as the servicemember. For spouses of servicemembers, it can provide substantial tax savings.
- Extend your tax deadline. Certain servicemembers can postpone their tax filing deadline. Those stationed abroad are allowed an automatic two-month extension to file a return. To use the automatic extension, you must attach a statement to your return explaining your qualifying situation. An extension to file doesn't extend the time to pay your tax. For servicemembers, such as those serving in a combat zone, the deadline for filing your tax return and paying your tax is automatically extended if you serve in a combat zone for the period of service plus 180 days after the last day in a combat zone.
- Exclude capital gains on your home. You’re eligible for exclusion if, during the five-year period (ending on the sale date), you owned your home for at least two years and lived in it as your main residence for at least two years. The added benefit for servicemembers is this: if you or your spouse serve on qualified official extended duty in the U.S. Armed Services or the Foreign Service, you may extend the five-year rule by 10 additional years. So, the minimum requirement you’d need to meet to save on capital gains tax would be living in the property for two of the last 15 years.
Once you’re ready to file your taxes, you can find free tax preparation and filing services on military bases and several free tax preparation and e-filing software options for military members. Continue to take advantage of tax breaks and the various retirement plan options available for servicemembers.
1Premature withdrawals from an IRA will be taxed at ordinary income tax rates and are subject to a 10% IRS penalty.