Tax Tips and Trivia
Did you become an expert on capital gain exclusions before your last permanent change of station? Don't worry - as a service member, you have free access to MilTax, Military OneSource tax services. This includes consultants who are experts in the tax code and how it applies to military life, as well as easy, secure tax preparation and filing software.
As you read these tax tips and trivia, remember: MilTax can help you navigate your taxes and flag every deduction and allowance you deserve.
Reporting Casualty Losses from Disasters
If you have property in an area determined by the President to be eligible for federal assistance, you can claim unreimbursed expenses from casualty losses on your tax return. If claiming a loss, use IRS Form 4684, Casualties and Thefts. Refer to IRS Publications 547 – Casualties, Disasters and Thefts, and 584 – Casualty, Disaster and Theft Loss Workbook. Additional resources can be found on the IRS website.
Exclusions for Combat Pay
Combat pay is partially or fully tax-free. Service members serving in support of a combat zone may also qualify for this exclusion. These areas include Afghanistan, the Persian Gulf, the Red Sea, the Gulf of Oman, the Arabian Sea north of 10 degrees north latitude and west of 68 degrees east longitude, the Gulf of Aden and the total land areas of Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, the Kosovo area and the United Arab Emirates.
State Taxes and Credits
File a state return for refundable credits such as the Earned Income Tax Credit.
Lifetime Learning Credit
Lifetime learning credit can be used to help offset any post-high school education courses that lead to new or improved job skills.
Military Spouse Residency Relief Act
Active duty service members have always been able to keep one state as their state of legal residency (usually their Home of Record) for tax purposes even when they move frequently on military orders. A state of legal residence is also considered their "domicile" or "resident" state. This was not so for the nonmilitary spouse until the Military Spouse Residency Relief Act was signed in 2009. Since then, a nonmilitary spouse of a service member may be able to keep the same resident state of the military spouse regardless of which state they live in. Under MSRRA, wages earned by spouses in non-resident state are exempt from taxes if the following three requirements are met:
- The service member is stationed, in compliance with military orders, in a state that is not their resident state
- The nonmilitary spouse is in that state solely to live with the service member
- Both the service member and spouse have the same resident state
Sale of Primary Home Capital Gain Exclusion
Many military families buy a home knowing they'll have to sell it when their next PCS comes around. It pays to know about capital gains tax ahead of time. If you make a profit on the sale of your home, you can generally avoid paying capital gains taxes on up to $250,000 of that profit, or $500,000 if married filing jointly, every two years. To be eligible, you must have owned the home for at least two years and lived in that home for at least two of the last five years. Service members not meeting the time and use test due to PCS orders may still qualify for the exclusion and not be taxed with the capital gain for sale of home.
Extension of Time to File
File Form 4868, Extension of Time to File, by April 17 if you need more time to knock those taxes into order. Although you are not required to make a payment of the tax you estimate as due, Form 4868 does not extend the time to pay taxes. If you do not pay the amount due by the regular due date, you will owe interest. You may also be charged penalties.
Prior Year Filing
Military OneSource tax consultants can assist you with filing prior year tax returns. However, Military OneSource online filing only addresses the current tax year filing. Other tax services are available to help you complete prior year returns. Military OneSource tax consultants can provide information on how to select an alternative filing source. Call 800-342-9647 to talk to a consultant and get those prior year returns squared away.
Non-cash Charitable Contributions (Itemized Deductions)
Clothing and other items donated to charities, and ingredients for meals donated to soup kitchens can be deducted if you keep records. Many organizations that accept donations provide a list of recommended values for donated items based on their condition. You can also deduct the costs of gas and oil that are directly related to getting to and from the place where you volunteer. If you do not want to figure your actual costs, you can deduct 14 cents for each mile.
Student Loan Interest Paid by Parents
Generally, interest from a student loan can only be deducted if the person is legally required to repay the loan and actually paid the debt. However, if parents make student loan payments for a child who is no longer a dependent, that child can deduct the student loan interest paid by the parents. Itemizing deductions is not required to claim this interest deduction.
Tax Extensions for Deployed Service Members
The IRS automatically extends tax deadlines for U.S. Armed Forces personnel deployed to a combat zone or in support of operations in a qualified hazardous duty area. The deadline for filing returns, making payments or taking any other action with the IRS is extended for at least 180 days after the last day of qualifying combat zone service or the last day of any continuous qualified hospitalization for injury from service in the combat zone.
Retirement Plan Contributions
An IRA or 401(k)-type plan might mean saving for retirement and cutting taxes too. Service members who contribute to a plan, such as the Thrift Savings Plan, may also be able to claim the Retirement Savings Contributions Credit.
Deductions for Reservists
Reservists whose reserve-related duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions. They can also deduct the purchase and upkeep costs of uniforms that they can’t wear while off duty, minus any allowance they receive for these costs.
Taxpayers can request a free transcript of tax returns covering the past three years. The 'Get Transcript' tool on IRS.gov is the fastest way to get a transcript.