Special Tax Breaks for Soldiers: How the IRS Thanks You For Your Military Service
Combat Pay, Death Benefits Exempt from U.S. Tax
The IRS has special tax rules for soldiers. This Hub is a guide to understanding them and aims to help loved ones on the Home Front maximize those benefits as they prepare tax returns at tax time.
Tax-Free Combat Pay
Under normal circumstances, U.S. military salaries are taxable just like it is for civilians. This all changes for members of the U.S. Armed Forces serving in combat zones. Any enlisted person or warrant officer, including commissioned warrant officers get a legal exemption from federal income taxes on their entire pay for any month they served in a combat zone, even if they served a single day of the month. Officers can also claim the same exclusion, up to $7,489.80 per month, the maximum amount paid to enlisted soldiers. Additional pay for coming under hostile fire or imminent danger also is exempt.
“Combat zone” is fairly broadly defined by the Department Defense, according to the IRS. It includes not only Afghanistan and Iraq, but many surrounding Middle East countries that support Operation Enduring Freedom and Operation Iraqi Freedom. Some of these countries include Jordan, Saudi Arabia, United Arab Emirates, Kuwait, and Bahrain. Those serving in Kyrgyzstan and Uzbekistan also may qualify.
Regular active duty pay remains taxable, as does other forms of compensation associated with redeployments, retraining, enlistment and re-enlistment bonuses, and per diem allowances. Pay received from civilian employers who pay the difference between a lower military salary and what the soldier received as a civilian worker may still be taxable. Family members with questions about what qualifies or who want to notify the IRS of their combat zone status (the IRS also suspends efforts to collect delinquent debts for soldiers serving in combat zones) can notify the IRS directly of their status through a special e-mail address: firstname.lastname@example.org.
Contractors Don’t Get Benefit
It’s important to note the tax free exclusion doesn’t extend to private security and defense contractors working alongside our troops. In a January 2011 decision, the U.S. Tax Court ruled an employee of Blackwater Security Consulting, which has since changed its name to Xe Services LLC, wasn’t entitled to the same benefit even though he worked in Iraq in 2005. That court ruling was significant because it overruled faulty advice IRS agents themselves had given civilian contractors in the field.
Untaxing the Ultimate Sacrifice
It may be small consolation, but the law waives all taxes for soldiers who die in action. The exclusion applies to the soldier’s entire income, not just his or her military pay. The exclusion covers any time the soldier served in a combat zone, so surviving loved ones can amend past year’s tax returns in some cases to get a refund of any taxes paid then (up to three years). Death benefits are also tax-free, just like life insurance for civilians.
Other Tax Breaks for U.S. Soldiers
U.S. soldiers also get the white glove treatment from the IRS in other areas, whether or not they serve in a combat zone. Some include:
♦ Automatic extension of filing and paying taxes, if they qualify. For example, U.S. soldiers deployed to Haiti after the April 2010 earthquake received an automatic six-month extension.
♦ Free tax preparation help
♦ Automatic power of attorney for one spouse to file on behalf of another when filing a joint return
♦ Extensive deductions for military personnel who retire and find work as civilians.
♦ The ability to withdraw money from retirement accounts with no penalty, which is helpful to members of the National Guard who takes a pay cut to serve.
♦ Tax-free day care for children, if provided by the U.S. Department of Defense.
♦ Special rules for avoiding tax on capital gains from home sales
♦ An above-the-line deduction for reservists and members of the National Guard required to travel for military-related purposes
♦ A waiver of penalties for withdrawals from college savings funds such as 529 plans for students who attend one of the service academies (where there is no tuition).
♦ A variety of generous rules by the states.