If you run a tax preparation business near a U.S. military base or serve veterans, it’s important to understand the unique benefits available to your clients who are eligible for military tax breaks. Active-duty military and U.S. Armed Forces veterans enjoy an array of military tax credits and benefits, many of which change annually.
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 several tax benefits you should consider when working on a tax return for a service member.
Tax benefits for active-duty military members
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. Generally, spouses of service members who are deployed or in a combat zone are entitled to the same filing extensions for their tax returns. However, you can inform clients that if they are ready to file their tax return, they do not need to wait for the service member to be available. They can sign and submit the return on behalf of the service member. 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, their combat pay is not taxable and won’t be reported on their W-2. Basic pay, reenlistment or continuation payments, and leave benefits received while in a combat zone are eligible for exclusion. If the service member made student loan repayments or received awards or other financial incentives while in a combat zone, that income is also eligible for exclusion. You won’t need to report this on the return you prepare for them. The combat pay exclusion would not apply to:
- Pay received while outside of a combat zone
- Pay for passing through a combat zone
- Pay for presence in a combat zone for personal convenience
3. Earned Income Tax Credit
The Earned Income Tax Credit (EITC) can provide valuable military tax benefits for eligible service 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 like Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) 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. Unreimbursed expenses may include trailer rental, packing costs, travel expenses, car expenses, and airfare.
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. Additionally, the client’s spouse is also able to sign extension forms on their behalf.
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.
Tax benefits for military veterans
Military tax benefits are available to your veteran clients as well. For example, many states don’t tax military retirement, while others have special tax provisions for military retirement pay. However, regulations change frequently, so it’s important to contact each state’s Department of Revenue to confirm tax exemptions for military retirement pay.
Many states also offer veterans property tax exemptions, though the qualifications for exemption vary widely by state. Some states only offer these property tax exemptions to disabled veterans, while others may receive some exemptions, deductions, or military tax credits based on years of service or property value.
Tax benefits for disabled veterans
Disabled veterans can enjoy an array of military tax benefits, too, including tax-free disability compensation from the Department of Veterans Affairs (VA) for service-related disabilities. Disabled veterans with combat-related injuries are also eligible for a tax-exempt, one-time lump sum disability severance payment.
Depending on your client’s state of residence, they may also enjoy a number of disabled veterans’ property tax exemptions. Some states offer reduced vehicle registration fees or sales tax exemptions to purchase medical equipment for disabled veterans.
Help your active-duty and veteran clients maximize their military tax benefits. TaxSlayer Pro offers a wide range of resources for tax preparers to help them navigate military tax credits and deductions and stay up to speed on new tax laws and credits.
