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U.S. military and service members have difficult jobs. It's burdensome not only for the member, but also spouses, children, friends and family. Knowing that the last thing our military clients want to worry about is taxes, we are putting together a series of articles to review tax benefits members of the military receive. Today, we’re focusing on the basic military pay information.
Combat Pay Benefits
If you are a member of the active military and served in a combat zone, you receive several special benefits. These benefits are assessed on a monthly basis, and it's important to note that you only need to serve one day of the month in order to have the entire month count as combat zone pay.
The following is a list of payments that are eligible for the combat zone exclusion. This simply means that if you worked in a combat zone for a qualifying month, these payments are excluded from your taxable income.
- Active duty pay earned in any month served in combat zone;
- Imminent danger/hostile fire pay;
- A reenlistment bonus if the voluntary extension or reenlistment occurs in a month you served in a combat zone;
- Pay for accrued leave earned in any month you served in a combat zone;
- Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters;
- Award for suggestions, inventions, or scientific achievements you are entitled to because of a submission you made in a month you served in a combat zone; and
- Student loan repayments. If the entire year of service required to earn the repayment was performed in a combat zone, the entire repayment made because of that year of service is excluded.
These military tax benefits and pay incurred in the combat pay are excluded from your gross income. The pay will not be included in the wages reported on your W-2. This is Congress's way of compensating our service members (via tax-free income).
Moving and Traveling Expenses for Military Members and Reservists
If you are a member of the reserves and you travel more than 100 miles away from home in connection with your services, you can deduct your travel expenses. Even better, you get to deduct them on line 24 of your 1040, as opposed from the normal itemized deductions. This ensures that you receive this military tax benefit in full. If you were to deduct travel expenses as an itemized deduction on Schedule A, you will be limited in the amount you are able to actually claim. Usually, the deduction is completely disregarded.
You can also deduct your unreimbursed moving expenses following a change in permanent change of station. This is true as long as the change is related to a change of station.
Benefits Related to Selling Your Home
If you are a civilian, you can avoid paying capital gains on the sale of your primary residence as long as the gain is less than $250,000 for single and $500,000 for married filing jointly. That means if you bought a residence for $300,000 and 10 years after living there, you sell it for $500,000 you do not have to report the $200,000 gain. However, there is a stipulation. You must live in that residence for at least two of the past five years in order to claim it as a principal residence.
As a service member, you are allowed to suspend the five year test for up to 10 years while on a qualified extended duty.
This is not the case for service members. Service members receive a huge advantage here that should make them ALL want to invest in real estate. As a service member, you are allowed to suspend the five year test for up to 10 years while on a qualified extended duty. So if you are assigned to a duty station at least 50 miles away for more than 90 days, you are allowed to extend the five year test for up to ten years. Not a bad deal.
Several of my military clients capitalize on this rule and I encourage you to do the same if this option is available to you. They will purchase a property, live in it for a number of years, and then rent it for up to the amount of time they are able to extend the five year rule (sometimes a full ten years!). This is great for two reasons: (1) they are receiving rental income during the time they are not physically living in the home; and (2) they can still sell the home and exclude capital gains.
Can you imagine being able to exclude capital gains for up to ten years? You'd be able to ride out market cycles and sell at a premium, top dollar amount. Your ability to build wealth increases drastically as your portfolio expands. We'll talk about technicalities in a later article, but this is a huge benefit you should absolutely consider taking advantage of.
Conclusion
As you can see, military/service members receive huge tax benefits, and we're only scratching the service. Keep an eye out for the next part of our military series and sign up for our newsletter so that you don't miss out. We'll discuss each of the specialized rules and regulations and hopefully make the tax code a bit easier to understand.