If you run a tax preparation business near a U.S. military base or serve veterans, make sure you know about military tax benefits. Active-duty military and U.S. Armed Forces veterans enjoy an array of military tax credits and benefits, many of which change yearly. Here’s our guide to help you navigate all the ways you can help your active duty and veteran clients save on their next tax bill.
Do military members pay taxes?
Military personnel do pay taxes, just like other U.S. citizens. Active-duty service members pay federal and state taxes on basic pay, bonuses, and most additional pay. However, military housing and food allowances are tax-exempt.
Tax benefits for active service members
As a tax preparer, it’s important to stay informed about military tax benefits for active-duty service members, especially since IRS rules change frequently. Here’s a short list of the top tax benefits for Armed Forces personnel:
- Some Armed Forces members may qualify for extra time to file and pay their taxes. If your client is in a combat or contingency zone, they automatically receive extra time to file and don’t need to take any action. However, if your client is in the U.S., they should file Form 4868 and pay any part of their expected tax liability to get a six-month extension.
- Military personnel serving in a combat zone automatically receive a combat pay exclusion. Certain combat pay is not taxable and won’t be reported on W-2s, which means you won’t need to report this pay on clients’ returns.
- Service members can take a moving expense deduction if they experience a permanent change of station (PCS). However, you’ll need to make sure any expenses you deduct on their taxes are not covered by the military’s moving allowance.
- Military members and their spouses can choose where they file their taxes following relocation to another state for military duty. Both can keep their prior residence for tax purposes, providing substantial savings for your clients if their former residence was in a state with lower or no income tax.
- Active-duty military can take a uniform deduction for the purchase and upkeep of a uniform that regulations prohibit them from wearing while off duty. However, you can only deduct the portion of their expenses not covered by any uniform allowance they receive.
- Service personnel’s spouses may sign their joint tax returns without obtaining a power of attorney if the service member is absent due to certain military duties or conditions.
- Members of the U.S. Armed Forces Reserves may deduct unreimbursed travel costs to perform reserve duties more than 100 miles away from their homes.
Military rules for the Earned Income Tax Credit and combat service
Active-duty personnel can also take advantage of specific tax benefits, including special rules for the Earned Income Tax Credit (EITC). If your client has nontaxable combat pay, they can include it in their EITC calculation even though the combat pay is nontaxable.
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, because regulations change frequently, it’s important to contact your 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.
