As a tax preparer, it’s important to understand the unique benefits available to your clients in the U.S. Armed Forces. Tax breaks like combat pay exclusion, the Earned Income Tax Credit, and deductions for moving and uniform expenses can significantly reduce your client’s tax liability and potentially increase their refund. Here are seven tax benefits you should consider when working on a tax return for a service member.
1. Extra time to file
Some members of the military can qualify for an automatic extension of time to file and to pay taxes. If your client is in a combat or contingency zone, they don’t need to take any action to receive extra time. If your client is in the U.S., they should file Form 4868 or pay any part of their expected tax due to get a 6-month extension.
2. Combat Pay Exclusion
If your client served in a combat zone, certain combat pay they earned is not taxable and–consequently–won’t be reported on their W-2. You won’t need to report this on the return you prepare for them.
3. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) can provide valuable tax benefits for eligible Armed Forces members. Specifically, if the service member or spouse received nontaxable military pay, such as combat pay or specific allowances, they can include this income when calculating the EITC. Including nontaxable pay can potentially increase their refund or reduce your tax liability. You should evaluate both scenarios for your clients—including or excluding nontaxable pay—and choose the option that maximizes the benefit for their situation.
4. Moving expense deduction
If your client experienced a permanent change of station (PCS), they may be allowed to deduct some unreimbursed moving expenses. Be certain that any expenses you deduct are not covered by the military’s moving allowance.
5. Uniform deduction
If your client purchased and pays for the upkeep of a uniform that regulations prohibit them from wearing while off duty, those expenses could be deductible. If they receive an allowance to cover uniform costs, you must reduce the deduction by that amount.
6. Signing joint returns
If your client is absent due to certain military duty or conditions, their spouse may be able to sign for them without obtaining power of attorney.
7. Reservists’ travel deduction
Members of the U.S. Armed Forces Reserves may deduct the unreimbursed costs of travel to perform reserve duties that are more than 100 miles away from their home.
For complete information about these benefits, current year tax laws, and what circumstances qualify, please read IRS Publication 3 Armed Forces’ Tax Guide.
