The information contained in this article is meant to provide awareness of available benefits for survivors of service members. This article is not meant to be comprehensive and is not intended to replace the consultation of a tax professional.
When a service member dies on active duty, the Internal Revenue Service may forgive the amount of federal tax that the service member would have paid, as well as refund the tax paid for a period of time prior to the death.
Forgiveness of a decedent's tax liability
The amount of money you pay the federal government through taxes is known as your tax liability. This is different from the amount of money you pay when filing your tax return. Often, when you get a refund on your tax return, it's because the amount of money withheld from your paychecks throughout the year was larger than your total tax liability. Even with a refund, you still have a tax liability. Tax liability can be forgiven, or refunded if already paid, if a service member dies under any of the following circumstances:
- While on active duty in a combat zone
- From wounds, disease or other injury received in a combat zone
- From wounds or injury incurred in a terrorist or military action
Combat zone-related forgiveness
Service members who die while on active duty in a combat zone or who die at any place from wounds, disease or injury incurred while on active duty in a combat zone are entitled to tax liability forgiveness from the IRS. The IRS forgives the service member's tax liability for the tax year in which the death occurred and any earlier tax year ending on or after the first day the member served in a combat zone in active service. Additionally, any unpaid taxes for years ending before the member began service in a combat zone are forgiven and any of those taxes that are paid after the date of death will be refunded.
Service members who die while serving outside a combat zone in direct support of military operations in the zone; and who qualified for special military pay for duty subject to hostile fire or imminent danger are also eligible for tax forgiveness under the same rules as those who die while serving in a combat zone.
Tax forgiveness for service in a combat zone also applies to service members in a missing status, such as missing in action or prisoner of war, with one slight difference. For service members who were in a missing status, the date of death is the date his or her name was removed from missing status for military pay purposes, regardless of the actual date of death.
A detailed description of the IRS definition of a combat zone can be found in IRS Publication 3, "Armed Forces' Tax Guide."
Terrorist or military action-related forgiveness
Service members who die from wounds or injuries incurred in a terrorist or military action are eligible for tax forgiveness as well. In this case, the federal tax liability is forgiven for the tax year in which the death occurred, as well as any earlier tax year in the period beginning with the year before the year in which the wounds or injury occurred. For example, if a service member died in 2014 of wounds incurred in a terrorist attack in 2013, the tax liability would be forgiven for all tax years 2012 through 2014.
The IRS defines a terrorist or military action as any terrorist activity primarily directed against the United States or its allies or any military action involving the U.S. military and resulting from violence or aggression against the United States or its allies. Any multinational force in which the United States participates is considered an ally of the United States.
If the service member qualifies for tax liability forgiveness, only his or her portion of the joint income tax liability is eligible for forgiveness or refund. To determine the service member's portion of the joint tax, the person filing the claim for tax forgiveness must:
- Determine the income tax for which the service member would have been liable if a separate return had been filed
- Determine the income tax for which the spouse would have been liable if a separate return had been filed
- Multiply the joint tax liability by a percentage; this percentage is the service member's individual tax divided by the service member's individual tax plus the spouse's individual tax
The amount determined by completing these steps is the service member's tax liability that is eligible for the refund or tax forgiveness.
Residents of community property states
Community property states treat most property acquired during a marriage as jointly owned by both spouses. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If the service member's legal residence was in a community property state and the spouse reported half the military pay on a separate return, the spouse can get a refund of taxes paid on his or her share of the pay for the years involved. The forgiveness of unpaid tax on the military pay also would apply to the half owed by the spouse for the years involved.
Submitting a claim for tax forgiveness
Tax forgiveness for unpaid tax or a refund for tax that has already been paid is not automatic. Surviving spouses or the individual filing the tax return must submit a claim. If a tax return has not yet been filed, the individual filing the tax return should file a Form 1040 with the service member's W-2 and properly identify the claim as indicated below. If a return has already been filed, the individual filing the tax return should file a separate Form 1040X for each year in question.
All returns and claims must be identified by writing "Iraqi Freedom-KIA," "Enduring Freedom-KIA," "Kosovo Operation-KIA," "Desert Storm-KIA" or "Former Yugoslavia-KIA" in bold letters on the return or claim. On Forms 1040 and 1040X, the phrase "Iraqi Freedom-KIA," "Enduring Freedom-KIA," "Kosovo Operation-KIA," "Desert Storm-KIA" or "Former Yugoslavia-KIA" must be written on the line for total tax. If the individual was killed in a terrorist action, write "KITA" on the front of the return and on the line for total tax.
An attachment that includes a computation of the decedent's tax liability before any amount is forgiven and the amount that is to be forgiven should accompany any return or claim. Additionally, all returns and claims for refund must include a Form 1310, "Statement of Person Claiming Refund Due a Deceased Taxpayer" and a certification from the Department of Defense or the Department of State. Returns and claims must be filed at:
Internal Revenue Service
333 W. Pershing, Stop 6503, P5
Kansas City, MO 64108