Whether you are doing your own taxes or getting professional support from resources, such as Military OneSource MilTax or the Volunteer Income Tax Assistance program, the process can be a lot easier if you understand some important tax terms.
Tax definitions for military life
Be prepared for tax time with these tax definitions:
A tax return is the form you file with the IRS that reports your income, deductions, credits and taxes. Your tax refund is any overpayment, or refundable tax credit (see deduction vs. credit below), that is refunded to you after you submit your completed tax returns.
In general, a dependent is a person for whom you provided at least half their support for the year. The rules for claiming dependents vary based on their relationship to you.
If you are unsure who to claim as a dependent, contact a MilTax professional or get in-person assistance at a VITA location near you to review how IRS rules apply to your situation.
Military income can include taxable and nontaxable pays and allowances. In general, pays are taxable, and allowances are nontaxable, and there are exceptions, including the Combat Zone Tax Exclusion (see below).
Box 1 of your W-2 should show your taxable income; you are not required to make any adjustments or corrections. If you feel that your W-2 is not accurate, contact the Defense Finance and Accounting Service and your administrative or finance office to get it corrected.
Military members serving in a designated combat zone aren’t required to pay taxes on their pay. Under the Combat Zone Tax Exclusion, enlisted personnel and warrant officers can have their entire income exempt from taxes, including special pays and the value of bonuses that were earned during their time in a designated combat zone. Commissioned officers may exclude their income, including special pays, up to a specific amount that changes each year. The commissioned officer limit is equal to the highest rate of enlisted pay plus the amount of imminent danger/hostile fire pay.
Box 1 of your W-2 should show your taxable income for the year. Nontaxable pay earned in a combat zone is listed in Box 12 with the code Q next to it.
Contributions to tax-advantaged retirement programs may be pretax or post-tax.
Pretax contributions are taken out of your pay before you pay your taxes. They reduce your taxable income now, and you will owe taxes when you withdraw the money from the plan. In most cases, pretax contributions are called “traditional” contributions.
Post-tax contributions are taken out of your pay after taxes. Post-tax contributions do not reduce your taxable income now, but they are tax-free when withdrawn. In most cases, post-tax contributions are called Roth contributions.
Box 1 of your W-2 should show your taxable income, accounting for pretax retirement contributions. Pretax retirement contributions will be listed on your W-2 in Box 12, with the code D next to them.
Interest income is the income paid on bank accounts, such as savings accounts, checking accounts and certificates of deposit.
Investment income is the income paid on investment products, such as mutual funds and individual stocks. It may include interest, dividends, capital gains and other types of distributions.
When you sell a home, you may be subject to capital gains taxes on the profit. You may exclude $250,000 (single) or $500,000 (married) of profit from taxes if the home was your primary residence – meaning you would have had to have lived in the house for 24 out of the 60 months prior to the sale.
Active-duty military members have up to 10 years to sell the property, subject to certain restrictions. This means that active-duty military members may be able to exclude capital gains if they have occupied the house for 24 months out of the last 15 years.
Military members may be able to deduct certain unreimbursed moving expenses from their income if their move is due to permanent change of station orders. A complete list of instructions, restrictions and permitted items can be found in the Instructions for IRS Form 3903, Moving Expenses.
Adjusted gross income is your income minus any specific adjustments. Your adjusted gross income is the first thing calculated on your income tax return, with the result on line 8b. Your adjusted gross income is important because that amount determines your eligibility for certain tax credits, including the Earned Income Credit, Saver’s Credit, and Child Tax Credit and Credit for Other Dependents.
Taxpayers are permitted to take deductions from their income before taxes are calculated. You may choose between a flat rate, called the standard deduction, or calculate the total amount of your permissible individual deductions, which is called itemizing deductions.
An income tax deduction reduces the amount of income that is taxed. An income tax credit directly reduces the tax that you owe by the full amount of the credit. In the case of a nonrefundable credit, your tax can only be reduced to zero, or no taxes due. In the case of a refundable credit, the credit may reduce your tax to zero and then result in a payment to you.
Withholding is the amount of money that is taken out of each paycheck throughout the year and applied to your total tax bill at the end of the year. If you withhold too much money, you will receive a tax refund. If you don’t withhold enough money, you will need to make an additional payment with your tax return.
Your income tax is the total amount that is actually paid to the IRS, once all the calculations are done on your tax return. Taxes are paid through your withholding throughout the year and then also, if necessary, with an additional payment with your tax return.
Individuals who are self-employed pay a self-employment tax to contribute to Medicare and Social Security. Individuals who are employed by someone else have 7.65% of their pay withheld for Medicare and Social Security taxes, with their employer paying an additional 7.65%. Self-employed persons pay a 15.3% self-employment tax to cover those contributions. There is a cap on these taxes.
The Earned Income Credit is a credit for low- and moderate-income taxpayers. Eligibility is based on income, family size and other factors, and the amount of the credit is based on income and family size.
In general, taxpayers file their returns in their state of legal residence. However, active-duty military members and their spouses have special protections when they are living in a state solely due to military orders.
Under the provisions of the Servicemembers Civil Relief Act, a military member may choose to retain their legal residence in another state where it has been appropriately established.
The SCRA, as amended by the Military Spouses Residency Relief Act and subsequent laws, permits a spouse to use their active-duty service member’s state of legal residence for purposes of taxation and voting.
Military reservists, including National Guard, who are called to federal duty for more than 179 days may request a distribution from their tax-advantage retirement plan. Qualified reservist distributions are not subject to the 10% early withdrawal penalty, though they will incur the regular income tax if applicable. Reserve component members who use a qualified reservist distribution may recontribute the amount to their account within two years of leaving active service.
Free tax resources for the military
Make tax time easy with these no-cost tools built for the military:
- Military OneSource MilTax is a suite of free tools to help simplify the process of filing your income tax return. It includes free tax preparation and e-filing software, telephone consultations with tax professionals who understand the unique tax challenges of military families and a library of articles covering common military tax questions.
- The VITA program offers in-person tax assistance at many military locations. VITA coordinators are specially trained to address military-specific tax issues, such as combat-zone benefits and applying Earned Income Credit guidelines.
- Publications developed for the military, such as the IRS’s Publication 3, the Armed Forces’ Tax Guide.