Serving in the military brings many challenges, and a lot of those have tax implications. From frequent moves, to deployments, to earning various types of income, your tax situation isn’t easy to navigate. Fortunately, the tax laws include some exceptional cases for military service members. Here are 4 tax tips that will allow you to take full advantage of your benefits.
1. Choose your State of Legal Residence carefully
Your home of record – also known as your State of Legal Residence (SLR) – determines where you will pay your state income tax, so use this option to your benefit. You aren’t required to pay income tax in the state where you are stationed, unless you are earning civilian pay from that state. Only your SLR can tax your military pay. Choosing a state with low to no income tax means significant savings for you.
To claim a state as your SLR, you must establish residency in that state at some point, and the requirements to do so can vary. It might mean registering to vote or getting a driver’s license. You can change your state of legal residence by submitting a DD Form 2058 or State of Legal Residence certificate to your finance officer. There will be additional requirements to establish residency, so do your research and determine the best state to claim as your SLR and if you are eligible to change to that state.
2. Claim the tax exclusions and deductions you deserve
Combat pay exclusion – If you spent at least one day of a month in a combat zone, that means you spent the entire month in the zone for tax purposes. For enlisted military, warrant officers, and commissioned warrant officers, any income you earned while you were deployed to a combat zone is not taxable. If you are a commissioned officer, the amount you can exclude is equal to the highest rate of enlisted pay. If you are stationed overseas somewhere that is not a combat zone, you’ll need to pay income tax normally, as if you were stationed within the United States.
Non-taxed income – As a service member, you receive different types of income, and some of it is taxable. For example, you do owe federal income tax on your base pay and any incentive pay you might get. But you aren’t required to pay tax on benefits like Basic Allowance for Housing (BAH), BAS, overseas housing and cost of living allowances.
Moving expenses – When you PCS, you can deduct any moving expenses that are not already reimbursed or paid for by the government. If you get a moving allowance, you don’t have to pay tax on the amount you receive, but you can’t take a deduction for the costs your allowance is supposed to cover.
Travel expenses – If you are a member of the reserves and you travel more than 100 miles from home to fulfill your service requirements, you can deduct any expenses that are not already being reimbursed by the government. This can include anything from the time you leave home to the time you arrive back home after your service.
3. Use your BAH to do double duty
The amount of money you receive from the government for your BAH is not taxed. That’s a great tax break reserved for military. But did you know that you can use your BAH to pay for housing costs that are also tax deductible? You can use your housing allowance to pay for real estate tax and mortgage loan interest. Both can be written off if you itemize your deductions.
4. Take advantage of TaxSlayer’s special offer for military
TaxSlayer is proud to offer all members of the military a free Classic Federal Return, including unlimited phone and email support to help you through every step of the e-filing process. All TaxSlayer products are designed with the user in mind. Our tools guide you step-by-step, so you don’t have to be an expert to still get the maximum refund you deserve. TaxSlayer is proud to support those who serve.
This article is up to date for 2019 (the return you will file in 2020).