Tax Benefits and Deductions for Military Families
January 9 2018
For serving in the US military, Uncle Sam kindly rewards troops and servicepeople. He offers both tax breaks and tax deductions not available to civilians. Taking advantage at least some, if not all, will bolster your financial standing. This applies whether you’re on active duty or in the reserves. Learn about which breaks and deductions are available to military families below.
Tax Benefits and Deductions for Military Families
Save With Combat Pay
The biggest benefit that you can and should partake in is putting away combat pay into an IRA (TRP or Roth). Essentially, this money will never be taxed, except for tax on the earnings. A smart move is to create two rollovers from a traditional TSP. One for taxable, and one for tax-free contributions. This will simplify administration and paperwork, and keep track of the tax-free money you’re saving. Your contribution limits are also boosted beyond those for civilians, especially for a traditional TSP.
Early Withdrawals
In addition to the tax-free advantage above, you may be qualified to take early withdrawals without penalty. If you’re in the reserves, you can make early withdrawals if you were called to active duty after September 11, 2001 for more than 179 days, and you must make the withdrawal while on active duty.
Extended Deadlines
Due to your service and the many obstacles it brings, the IRS allows deadline extensions. This includes for filing returns, paying taxes, making claims for refunds, and contributing to IRAs. You do have to meet some qualifications for each. Consult your tax professional to see if you meet the requirements for extra time.
Home Selling Breaks
If you’re selling your home, you can pass on paying capital gains (up to $250,000 per individual and $500,000 per married couple) whether you’re a civilian or not, if you meet the requirement of having lived in the home for the past two of the five years before the sale. If you’re a service member, this time period is suspended for up to ten years while you’re on active duty (at least 50 miles from home for 90 days or more). This break requires an insider look, so be sure to speak with your tax professional about your particular circumstances.
Tax Assistance
Take advantage of free tax assistance available to you on base to feel confident that you are taking all of the breaks and deductions possible. The IRS directly trains volunteers via the Volunteer Income Tax Assistance Program to help you.
Moving and Travel Expenses for Military Families
Moving comes with active duty. If you move because of a permanent change, you may be exempt from meeting the distance rule.
As a member of the reserves of the Armed Forces, you can deduct the cost of travel for service-related purposes if the location is more than 100 miles from home as an adjustment to gross income instead of an itemized deduction, and limited to a federal per diem rate.
Uniforms
Uniforms are generally non-deductible, unless you are in the reserves. As a reservist, if you are restricted to only wearing your uniform on duty, deduct the unreimbursed amount on your tax return.
Forgiven Taxes and Death Benefits
Survivors of armed forces members who pass away on active duty receive $100,000 tax-free gratuity. The IRS also forgives any taxes owed at the time of death. And if taxes were paid, they will reimburse the amount will to the service member’s survivor.
Maximum Interest Rate for Military Families
The IRS caps your interest rate at 6 percent for any money owed to them, whether it began before your service or during. The reduced rate applies if your service affects your ability to pay, and applies to interest accrued while in the military.
The government rewards active military with benefits to bolster financial standing in repayment for their service. The best way to take advantage of them is to contact the services provided on military bases. You can also contact your seasoned tax professional.
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