This section covers the special tax situations of active members of the U.S. Armed Forces. It does not cover military retirees or veterans’ benefits or give the basic tax rules that apply to all taxpayers. If you need the basic tax rules or information on a subject not covered here, you can order IRS publications and forms by calling toll-free 1-800-829-3676 or visit the IRS home page.

For federal tax purposes, the U.S. Armed Forces includes commissioned officers, warrant officers and enlisted personnel in all regular and Reserve units under the control of the Secretaries of the Defense, Army, Navy, and Air Force. The Armed Forces also includes the Coast Guard.

Monthly Tax Withholding Computation

The military services use the percentage method for computing monthly taxes. In some cases there may be a slight variation from the computerized figures that are shown in the detailed pay tables in Section I of this almanac. However, any differences will equalize when filing your return after the close of the tax year.

TAX COMPUTATION (For 2000 taxable income)

The amount of wages referred to below represents monthly gross taxable wages less $233.33 per exemption for 2000. To compute your monthly income tax withholding, multiply the number of exemptions claimed by $233.33. Subtract this amount from your monthly gross wages (basic pay). Then use the result to calculate your taxes from the tax tables.

Example: Married officer O-4 with over 14 years of service claiming three exemptions, with taxable pay of $4,611.00 per month.
     a. $4,611.00 less $699.99 (3 x 233.33) = $3,911.01
     b. Tax = 15% of $3,373.01 (3,911.01 - $538)
     c. Total Federal tax withheld monthly = $505.95

Gross Income

Members of the Armed Forces receive many different types of pay and allowances. Some are includible in gross income while others are excludable from gross income. Includible items are subject to tax and must be reported on your tax return. Excludable items are not subject to tax, but may have to be shown on your tax return.

Includible items

These items are includible in gross income, unless the pay is for active service for any month during any part of which the member served in a combat zone declared by an Executive Order of the President or in a "qualified hazardous duty area" as designated by statute:

Basic pay for such items as: Active duty; Attendance at a designated service school; Back wages; Drills; Reserve training, and Training duty.

Special pay for such items as: Aviation career incentives; Diving duty; Foreign duty; Hazardous duty; Imminent danger; Medical and dental officers; Nuclear-qualified officers, and Special duty assignment pay.

Bonuses for such items as: Enlistment and Reenlistment

Payments for such items as: Accrued leave; Nondisability or separation pay; Personal money allowances paid to high-ranking officers; and Student loan repayment from from programs such as the General Educational Loan Repayment Program.

Excludable Items

The items in the following list are excludable from gross income. The exclusion applies whether the item is furnished in-kind or is a reimbursement or allowance. There is no exclusion for your personal use of a Government-provided vehicle.

• Living allowances for: BAH (Basic Allowance for Housing.) You can deduct mortgage interest and real estate taxes on your home even if you pay these expenses with money from your BAH; BAS (Basic Allowance for Subsistence); Housing and cost-of-living allowances abroad whether paid by the U.S. Government or by a foreign government.
• Family allowances for: Certain educational expenses for dependents; Emergencies; Evacuation to a place of safety, and Separation.
• Death allowances for: Burial services; Death gratuity payments to eligible survivors (not more than $3,000), and Travel of dependents to burial sites.
• Moving allowances for: Dislocation; Moving household and personal items; Moving trailers or mobile homes, Storage; Temporary lodging and Temporary lodging expenses.
• Travel allowances for: Annual round trip for dependent students; Leave between consecutive overseas tours; Reassignment in a dependent-restricted status; Transportation for you or your dependents during ship overhaul or inactivation; and per diem.
• Qualified Military Benefits: Commissary/Exchange discounts; ROTC educational and subsistence allowances; Uniform allowances paid to officers, and Uniforms furnished to enlisted personnel; Legal assistance; Space-available travel on Government aircraft; and Medical/dental care.

Dependency Exemptions

Exemptions reduce your income subject to tax. In 1999 each exemption reduced income by $2,750. For 2000, each exemption will reduce your income by $2,800. You generally can claim an exemption for yourself, your spouse, and each person who qualifies as your dependent. If another taxpayer can claim an exemption for you or your spouse, you cannot also claim the exemption on your tax return. If you can claim an exemption for a dependent, that dependent cannot claim a personal exemption on his or her own tax return. If you claim a dependent on your tax return, you must enter the dependent’s Social Security number on your tax return.

Dependents

A person is your dependent for tax purposes, if all five of the following tests are met:

• Member of household or Relationship test
• Citizenship test
• Joint return test
• Gross income test, and
• Support test

For specific information on these tests, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Adjustments to Income

There are certain adjustments to income you can claim. The one that may affect you the most is a deduction for contributions to an Individual Retirement Arrangement (IRA). For information on IRA’s see IRS Publication 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs).

Armed Forces members (including Reservists on active duty for more than 90 days) are considered active participants in an employer-maintained retirement plan.

Earned Income Credit

After you have figured your taxable income and tax liability, you can determine if you are entitled to any tax credits. Most tax credits do not have special rules for members of the Armed Forces. However, the earned income credit may be of interest to you.

The earned income credit (EIC) is a special credit for certain persons who work. The credit reduces the amount of tax you owe (if any) and is intended to offset some of the increases in living expenses and Social Security taxes.

See IRS Publication 596, Earned Income Credit for more information.

Eligibility

In you have a qualifying child, you must meet all the following rules to claim the earned income credit:
     1. You must have earned income during the year.
     2. Your earned income and modified adjusted gross income must each be less than $26,928 if you have one qualifying child, or $30,580 if you have more than one qualifying child. If you do not have a qualifying child and earn less than $10,200, see Persons Without a Qualifying Child.
     3. Your filing status can be any filing status EXCEPT married filing separate.
     4. You cannot be a qualifying child of another person.
     5. Your qualifying child cannot be the qualifying child of another person whose modified adjusted gross income is more than yours.
     6. You did not file Form 2555, Foreign Earned Income (or Form 2555-EZ, Foreign Earned Income Exclusion) to exclude from your gross income any income earned in foreign countries, or deduct or exclude a foreign housing amount. See IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for more information.
     7. You must be married to a U.S. citizen or resident if you are a nonresident alien. In addition, you must choose to be treated as a resident alien for the entire year. See IRS Publication 519 for more information.
     8. You did not have more than $2,350 in investment income during the year (unless you are also filing Form 4797 (relating to sales of business income)). For most people, investment income is taxable interest and dividends, tax-exempt, and capital gain net income.
     9. You must include your Social Security number on your return. If you are married, you must also include your spouse’s Social Security number.

Qualifying Child

You have a qualifying child if your child meets three tests: relationship; residency; and age. Each test has separate rules. See IRS Publication 596, Earned Income Credit for details.

If your child does not meet all three tests, then you cannot claim the credit.

Persons Without a Qualifying Child

If you do not have a qualifying child, you may take the credit if you meet all the following rules:
     1. You must have earned income during the year.
     2. Both your earned income and modified adjusted gross income must each be less than $10,200.
     3. Your filing status must be any filing status except married filing a separate return.
     4. You (or your spouse if filing a joint return) cannot be claimed as a dependent by another person.
     5. You (or your spouse if filing a joint return) must be at least 25 but under 65 at the end of the tax year.
     6. Your main home must be in the United States for more than half the year. US military personnel stationed outside the United States on extended active duty are considered to live in the United States.
     7. You did not file Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion.
     8. You must be married to a U.S. citizen or resident if you are a nonresident alien. In addition, you must choose to be treated as a resident alien for the entire year.
     9. You did not have more than $2,350 in investment income during the year (unless you are also filing Form 4797 (relating to sales of business income)). For most people, investment income is taxable interest and dividends, tax-exempt, and capital gain net income.
     10. You must include your Social Security number on your return. If you are married, you must also include your spouse’s Social Security number.

How to claim credit

To receive your credit, you must file a tax return. You can use Form 1040, Form 1040A, or 1040EZ to figure and claim the credit yourself. You can also ask the IRS to figure the credit for you. For more information, see IRS Publication 596, “Earned Income Credit.”

Earned Income

For purposes of the earned income credit, earned income includes:

• Wages, salaries, tips
• Long term-disability benefits you received prior to minimum retirement age
• Voluntary salary deferrals
• Housing and subsistence allowances and the value of in-kind quarters and subsistence received by military members (these will be reported in block 13 of your Form W-2)
• Pay for service in a combat zone
• Net earnings from self-employment
• Anything else of value, even if not taxable, that you received for providing services.

Earned income does not include interest, dividends, Social Security payments, welfare benefits, pensions, annuities, veterans’ benefits, variable housing allowances, workers’ compensation, or unemployment compensation.

Married Taxpayers

If you are married, you and your spouse usually must file a joint return to claim the earned income credit. Even though you are married, you may file as head of household and claim the credit on your return if:
     1. Your spouse did not live in your home at any time during the last six months of the year,
     2. You paid more than half the cost to keep your home for the entire year, and
     3. Your home was, for more than six months, the main home of your child for whom you will be entitled to claim an exemption.

You will meet (3), even if you cannot claim your child as an exemption because you released your claim in writing to the other parent or there is a pre-1985 agreement (decree of divorce or separate maintenance or written agreement) granting the exemption to your child’s other parent.

Advanced Earned Income Credit

If you expect to qualify for the earned income credit (EIC) for 2000, you can choose to get part of the credit in advance by giving a completed Form W-5, Earned Income Credit Advance Payment Certificate, to your appropriate finance office. The credit will be included regularly in your pay. These advance payments could be as much as 60 percent of the EIC for one qualifying child.

Child Tax Credit

If you have a child who was under age 17 at the end of 1999, you may be able to claim the child tax credit, the additional child tax credit, or both. To claim the credit, your child must be under age 17 at the end of 1999; be your dependent; be your son, daughter, adopted child, grandchild, stepchild, or foster child; and be a United States citizen or resident alien. The child tax credit reduces the tax you owe; the credit can be as much as $500 for each qualifying child. For more information, see the Instructions to IRS Forms 1040 or 1040A, or see , Publication 17“Your Federal Income Tax.”

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