When it comes to taxes, the two key factors that determine your filing requirements are your income and state of residence. For active-duty service members, your tax circumstance and requirements can change year to year. Fortunately, the IRS offers several exceptions to lighten your tax load, including income exclusions and accommodating state filing requirements. Here are four tax tips that will allow you to take full advantage of your benefits and streamline your filing process.
1. Choose your state of legal residence for tax purposes
Your home of record is the state where you initially joined the military. However, your state of legal residence (SLR) is your legal domicile and the place you consider your home or intend to live in once you leave the military. While your home of record remains the same, your SLR may change during service. Your SLR determines where you will pay state income tax. You can use this 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 can mean significant savings for you.
To claim a state as your SLR, you must establish residency in that state, and the requirements to do so can vary. It might mean registering to vote or getting a driver’s license.
Changing your state of legal residence in the military
Your state of legal residence is where you intend to establish your permanent home or return to after completing your military service. You can change your SLR by submitting a DD Form 2058 or a state of legal residence certificate to your finance officer. To change your SLR, you must meet the following criteria:
1. Have a physical presence in the new state
2. Intend to abandon your old legal residence
3. Intend to remain permanently in the new state
If multiple states qualify as your SLR, you can choose the state that offers the most tax benefits for your circumstances.
2. Understand taxable military income
Military compensation typically includes two main categories: pay and allowances. Most pay is considered taxable, meaning you’ll have to pay federal income tax on it, while allowances are generally nontaxable. Nontaxable allowances are excluded from paying taxes. Examples of taxable pay include:
- Basic Pay – Your fundamental salary
- Active-Duty Pay – Pay received during active duty, including periods of training
- Bonuses – Including enlistment and reenlistment bonuses
- Special Pay – Additional pay for specific duties, such as Hazardous Duty Pay, Flight Pay, and Submarine Pay
You’ll pay federal tax on this category of income. However, you aren’t required to pay tax on benefits like Basic Allowance for Housing (BAH), BAS, overseas housing, and cost of living allowances.
3. Claim military tax deductions and exclusion
Understanding the various tax deductions and exclusions available to military service members can help you maximize your tax benefits and reduce your taxable income. Here are some key deductions and exclusions you should know about:
- 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 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 pay income tax normally as if you were stationed within the United States.
- Moving expenses – When you PCS, you can deduct any moving expenses that have not already been 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 travel-related expenses that the government is not already reimbursing. This can include anything from the time you leave home to the time you arrive back home after your service.
4. Use your Base Housing Allowance (BAH) for housing costs
The amount of money you receive from the government for your BAH is not taxed. 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.
Ready to file? Take advantage of TaxSlayer’s offer for military
TaxSlayer is proud to offer a free federal return for all active-duty members of the military, 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, so you don’t have to be an expert to get the maximum refund you deserve. TaxSlayer is proud to support those who serve.
Military tax filing FAQs
The frequent relocation and various types of income often make tax filing for service members different each year. Here are some common questions and answers you might encounter as military personnel.
Do active military members pay taxes?
Yes, active military members are required to pay federal and state income taxes, though certain types of military pay, such as combat pay, may be excluded from taxable income.
Can military members file taxes for free?
Yes, if you are an active-duty member, you can file a federal return for free with TaxSlayer. You can file all major forms, credits, and deductions with unlimited phone and email support.
Can military members request tax filing extensions?
Yes, just like civilian taxpayers, military members can request tax filing extensions. Those serving in combat zones automatically receive an extension of at least 180 days after they leave the combat zone to file their taxes.
Is military retirement pay taxed?
Although military pay is typically taxed as wages, military retirement income is taxed as a pension. Retirement and pension income is typically subject to different tax rates than wages and salaries. The taxable amount of your retirement benefits depends on your age and length of service.
