Tax Benefits for U.S. Military Personnel
Members of the U.S. Military Can Enjoy Certain Tax Breaks
Members of the U.S. Armed Forces, particularly those deployed in combat zones, are faced with unique tax situations and are eligible for special tax benefits.
For Federal tax purposes, the U.S. Armed Forces includes the following:
- Commissioned officers, warrant officers, and enlisted personnel (in all regular and reserve units) under control of the Secretaries of Defense, Army, Navy, and Air Force
- The Coast Guard
[NOTE: The U.S. Armed Forces does not include the U.S. Merchant Marine or the American Red Cross.]
Housing & Moving Expenses
Some of the most helpful military tax benefits apply to housing and moving expenses. Under normal circumstances, a taxpayer must meet specific conditions to qualify for a moving expense deduction. Military personnel, however, are entitled to certain exemptions from the distance and time tests.
If a member of the U.S. Armed Forces is required to move because of a permanent change of station, they are allowed to deduct unreimbursed moving expenses. These expenses are calculated on IRS Form 3903 (Moving Expenses) and entered on Line 26 of IRS Form 1040 (U.S. Individual Income Tax Return). Furthermore, a member of the U.S. Armed Forces who permanently changes station may deduct moving expenses from their final duty post for up to one year after retirement or other termination of active duty.
For military personnel, travel and lodging related to the move are tax-deductible, but meals are not. The value of moving or storage services provided by the government is not included as wages on Form W-2 (Wage and Tax Statement), nor are temporary lodging allowances. However, if a military member’s moving allowance exceeds the actual cost of the move, the excess amount should be report as wages on Form W-2 (or else included as gross income on Line 7 of Form 1040). Note that an eligible individual can only deduct the part of the move that has not been reimbursed.
At some point in their military career, armed services personnel may have to sell a house because of a change in duty post. The exclusion of gain from the sale of a house is up to $250,000 for a single taxpayer (or $500,000 for married joint filers), subject to specific ownership and occupancy limitations. Military personnel may elect to suspend the occupancy test — generally 2 years out of the 5 years immediately preceding the sale — during any period of active duty. Keep in mind, these rules can get complicated and since large sums of money are involved, it would be wise to seek professional tax advice when dealing with the sale of a residence.
Similar to a civilian taxpayer, a member of the U.S. Armed Forces is entitled to a tax deduction for mortgage interest and real estate taxes on a home. Military personnel have the added benefit of being able to claim a deduction even if they pay these expenses with their Basic Allowance for Housing (BAH).
A member of the U.S. military serving in a combat zone (as an enlisted person or warrant officer) is not subject to income tax on their military pay. “Combat pay” includes time spent in a combat zone, or time spent in a hospital while healing from wounds, illness, or injury sustained while serving in a combat zone.
Combat pay is excluded from gross income and does not have to be reported on an income tax return because it is not reported on the Form W-2. There is, however, a limit to this monthly exclusion for commissioned officers. [Note that if the combat pay has been mistakenly reported as “Wages” in Box 1 of Form W-2, the individual must request a corrected Form W-2.]
If a member of the U.S. Armed Forces served in a combat zone for any part of a month — even just one day — they are entitled to an income tax exclusion for all the military pay received that month. Enlisted personnel can also exclude re-enlistment bonuses if they re-enlist during a month they serve in a combat zone. However, reservists who are called to active duty must report any income they receive from their regular employer, even while in a combat zone. There are a number of additional exclusions to the wages of military personnel, including uniform allowances and disability pay.
For more information about the tax treatment of active duty military personnel, please refer to IRS Publication 3 (Armed Forces’ Tax Guide).
For non-active or retired military personnel, information about veterans’ benefits or military pensions can be found on Pages 15–16 and Page 18, respectively, of IRS Publication 525 (Taxable and Nontaxable Income).