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Untitled Document

The Stress-Free Tax Guide

by David Grayson, Military.com Staff Writer


Source: Internal Revenue Service

The word "taxes" conjures images of stress and hair-pulling, especially for service personnel. Whether it's changing duty stations, serving in a combat zone, or collecting veterans benefits, service personnel can face unique tax situations. But taxes do not have to be a stressful experience if you have the information you need. Fortunately, there is plenty of readily accessible information both on the Web and off -- including forms you can download and places you can turn to for help. Using these resources can make your tax season easier.

Who must file?

Most civilians and active duty personnel must file two tax returns: federal and state. However, some states do not require active duty personnel to pay income taxes.

Federal Taxes

Generally, you must file a federal tax return if:

  • you are single
  • you made over $7,050 in 1999

or:

  • you are married
  • your combined gross income was over $12,700

To determine if you must file a federal tax return, answer the IRS's Filing Requirements question tree.

State Taxes

There are some states that do not require military personnel to pay state income taxes. These states are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Other states give special breaks on military pay. These are: California, Oregon, Idaho, Montana, North Dakota, Arizona, Oklahoma, Arkansas, Tennessee, North Carolina, South Carolina, Missouri, Iowa, Michigan, Wisconsin, Illinois, Indiana, Ohio, West Virginia, Pennsylvania, New York, Maryland, Vermont, and New Hampshire.

To determine if you have to file a state tax return, you must first determine which state you are resident of. You must pay taxes in the state where your domicile is (your permanent home). This is not necessarily where your duty station is located.

To ensure that you receive up-to-date information on whether you should file a state tax return, and other benefits, contact your state's tax office.

Downloading Forms

You can download federal tax forms from the IRS's Forms and Publications site. You can also file electronically, using the IRS's e-file system or by using one of a number of software packages. For more information on filing, see the section Filing Returns in the Armed Forces' Tax Guide.

You can download state tax forms from your state tax agency.

Deductibles

Deductibles help you reduce your taxes for legitimate expenses and issues. According to the IRS, there are two deductibles that are particularly relevant for active duty personnel:

  • You can deduct contributions to individual retirement arrangements (IRAs). Active duty personnel (and reservists on active duty for more than 90 days) are considered to be active participants in an employer-maintained retirement plan
  • You can deduct moving expenses because of a permanent change of station

There are a number of other deductions, credits and exclusions for active duty personnel, veterans, and others. These include:

For information, see the IRS's useful "tax trails."

What if I can't afford to pay?

The IRS recommends that you file your return by April 15 even if you can't pay all of the amount you owe. By filing on time, you avoid the late filing penalty. The IRS also recommends that you pay as much of the amount you owe as possible, because you reduce the amount of interest and late payment penalty that you will owe.

For more information on late payment, read the IRS's FAQs on collection.

Should you use a professional tax preparer?

The decision to use a professional tax preparer is a matter of personal choice. People use tax preparers for a variety of reasons:

  • They have a complicated tax situation
  • They get frustrated or stressed out doing their taxes
  • They don't have time

Once you decide you want to hire a tax preparer, you then have to choose the right one. Selecting a tax preparer is no different from choosing say, a mechanic or a dentist. There are a few common sense guidelines to follow:

  • Get referrals from friends
  • Check the Better Business Bureau or local Chamber of Commerce to see if there have been any complaints lodged against the preparer
  • Ask for references, and contact them
  • Make sure that the preparer or company will be around after tax season ends. Just as you want to be sure that your mechanic is still in business in case anything goes wrong with your car after repair, your tax preparer should be there in case there is a mistake
    • Your tax preparer should carry liability insurance as well

The following is a list of questions the IRS recommends asking a tax preparer:

  • What tax services are offered?
  • Who will be preparing my tax return?
  • Do you offer additional services, like financial planning?
  • How many tax returns do you prepare each year?
  • Do you have references that I may see and follow up on?
  • What is your experience with audits? Will you still be around after the tax season? If I am audited, will the person who did my taxes handle it? What percentage of your clients have been audited?
  • Do you specialize in any tax areas?
  • How aggressive are you when it comes to finding ways to reduce my federal tax bill?
  • Have you ever been fined or penalized in regards to tax returns prepared and filed?
  • What is your educational background in taxes?
  • Do I pay you by the hour or flat fee?

Finally, after you've selected a preparer, to make the process go smoothly, make sure you have all of your records organized and accessible when you meet

Record Keeping

The IRS recommends that you keep your tax returns, as well as supporting documentation, for three to six years.

Problems with filing taxes

If you experience any problems with your tax situation, or dealing with the IRS, contact the IRS's Taxpayer Advocate Service.

Glossary

Domicile
Your domicile is NOT your duty station; it is your permanent residence, and where you pay your state taxes.

Gross Income
Gross Income includes all income from all sources. Gross Income generally includes, but is not limited to the following:

  • Wages, salaries, tips, and other compensation
  • Pensions, taxable Social Security benefits
  • Unemployment Compensation
  • Sick pay
  • Alimony payments
  • Interest, rent, royalties, dividends

The IRS's Armed Forces' Tax Guide contains a full list of items includible in gross income.

Adjusted Gross Income
Adjusted Gross Income is your Gross Income minus your adjustments. Two adjustments are particularly relevant for service members: moving expenses and individual retirement arrangements (IRAs). You can deduct moving expenses because of a permanent change of station.

Serving Overseas
When military personnel change their duty station anywhere in the world, payroll officers normally transfer a Notice of Levy to the proper payroll officer at the new duty station.

Serving in a Designated Combat Zone
Those who serve in an officially designated combat zone, or a qualified hazardous duty area, will have their tax payments requirements suspended during their service. This also applies for any period of continuous hospitalization outside the U.S. as a result of injury received during combat service, plus 180 days thereafter. For more information, see the section Combat Zone Exclusion in the Armed Forces' Tax Guide.

Veterans
Military retirement pay is taxed as a pension.

Veterans' benefits administered by the Department of Veterans Affairs are not included in gross income. The following amounts paid to veterans or their families are not taxable:

  • Education, training, or subsistence allowances
  • Disability compensation and pension payments for disabilities paid either to veterans or their families
  • Grants for homes designed for wheelchair living
  • Grants for motor vehicles for veterans who lost their sight or the use of their limbs
  • Veterans' insurance proceeds and dividends paid either to veterans or their beneficiaries, including the proceeds of a veteran's endowment policy paid before death
  • Interest on insurance dividends you leave on deposit with the VA

For more information of veterans benefits, see the section Certain Rules for Special Employees in IRS Publication 525: Taxable and Nontaxable Income.

Sources/Further Resources