On Nov. 11, the nation will honor veterans who have served in our military, but it is also a good time for a brush up on special tax rules for those who are still serving and their families.
The pay received by members of the military is generally subject to tax just like it is for civilian workers. However, a special exclusion applies to pay received for any month in which a military member served on active duty in a combat zone or hazardous duty area [IRC Sec. 112]. The exclusion also generally applies to pay received for any month a military member was hospitalized as a result of wounds, disease or injury incurred while serving in a combat zone. In the case of an enlisted member, warrant officer or commissioned warrant officer, the exclusion applies to all pay received for a month. For other commissioned officers, the exclusion is limited to the highest rate of enlisted pay for that month, plus any imminent danger or hostile fire pay. For 2019, the maximum exclusion is $8,466.82 ($8,241.82 + $225 imminent danger pay) per month.
Tax return tip: There’s generally no need to calculate the combat pay exclusion. The excluded income should not be included in Box 1 wages on Form W-2; it is reported in Box 12 with Code Q.
The Tax Cuts and Jobs Act eliminated job-related moving expenses for tax years beginning after 2017 and before 2026. However, that tax crackdown did not apply to members of the armed forces. Military members can still deduct unreimbursed moving expenses incurred pursuant to a military order in connection with a permanent change of station [IRC Sec. 217].
Tax return tip: Moving expenses deductions for military members are calculated on Form 3903, Moving Expenses, and reported on Line 26 of Schedule 1, Additional Income and Adjustments to Income, of the redesigned Form 1040.
Earned Income Credit
Although combat pay is excludable from gross income, a military member can elect to include combat pay in earned income for purposes of the earned income credit (EIC) [IRC Sec. 32(c)(2)(B)]. The credit should generally be figured with and without the nontaxable combat pay. However, as a general rule, including the combat pay will increase the EIC only if earned income without the combat pay is less than the earned income amount for claiming the maximum credit ($6,920 for no qualifying child, $10,370 for one qualifying child, $14,570 for two or more qualifying children for 2019).
Tax return tip: For military members who elect to include combat pay in earned income when computing the EIC, enter “NCP” and the amount in the space to the left of the line for claiming the credit (Line 17 on the redesigned Form 1040).
As a general rule, military members must file their returns by the same April 15 deadline as other taxpayers. However, military members who are stationed outside the United States on the return due date get an automatic two-month extension to June 15 to file their returns, and can request an additional four-month extension to Oct. 15 by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.
Bear in mind that only the filing deadline is extended; interest will be charged on any tax due that’s not paid by the regular return due date. However, military members may qualify for a payment extension by notifying the IRS that ability to pay the tax due has been materially affected by military service.
Tax return tip: Form 4868 is not required to obtain an automatic two-month extension. However, military members who use the extension must attach a statement to the return showing that they qualify.
For military members serving in a combat zone or contingency operation, the due date for filing a return — and for paying tax due — is generally extended until 180 days after the last day of service in the combat zone or contingency operation (or the last day of hospitalization for injury from service in the combat zone or contingency operation).
Tax return tip: Despite the extended deadlines for combat zone and contingency operation service, military members who are due refunds may want to file sooner rather than later. In the case of married couples, both spouses must generally sign the return. However, if the military spouse is unable to sign because they are serving in a combat zone, the other spouse can sign on their behalf by attaching a signed statement to the return explaining that the military member is serving in a combat zone. In other cases, a military member who expects to be overseas on the return due date can file Form 2848, Power of Attorney and Declaration of Representative, designating his or her spouse to sign the couple’s return.
State Tax Requirements
State tax requirements for active duty military members are determined by their state of legal residence (SLR). This is generally the military member’s home of record — the state recorded by the military as the member’s home when they began military duty — unless the member officially changed it to another state. Under federal law, active duty military members may be taxed on their military pay only by their SLR, regardless of where they are stationed. However, state tax requirements vary. For example, some states may tax military pay only if the military member is actually living in the state, while others may exempt military pay entirely.
Under the Military Spouse Residency Relief Act, a nonmilitary spouse of a military member can choose to maintain the same state of legal residence as the military spouse. If the spouse makes this election, income earned in another state will generally be exempt from that state’s income tax, but may be taxed by the state of legal residence.