For regular citizens, the fiscal cliff deal brings lots of changes to how our taxes will be calculated.
In many cases, Uncle Sam recognizes the sacrifices members of our nation's armed forces make, and offers special privileges to compensate. When it comes to paying taxes, for example, military members can claim a host of tax advantages that aren't available to civilians.
Potential for retirement savings. Even better, the IRS will let you put tax-free combat pay in the Thrift Savings Plan or an Individual Retirement Account.
"If you put that money in a Roth IRA or Roth TSP you could get a great deal," says J.J. Montanaro, a certified financial planner ™ practitioner with USAA. "You'll essentially have a pot of money that you've never paid taxes on because qualified distributions from these accounts are not taxed at all. Tax-free in and tax-free out is hard to beat."
Your federal Thrift Savings Plan also benefits, as your combat-zone service will boost traditional TSP contribution limits to $51,000 in 2013 and $52,000 in 2014. Dollars that go into your traditional TSP tax-free won't be taxed when you withdraw the money -- though you will owe tax on the earnings. If you're rolling over a traditional TSP that has tax-free contributions, consider creating two separate rollovers: one for the taxable contributions and earnings, and the other for the tax-free assets. This will not only simplify accounting, but also ensure you properly recognize your tax-free combat pay contributions that may have been deposited to a traditional TSP/rollover IRA.
Contributions to a Roth TSP remain capped at $17,500. Montanaro suggests, "Until you hit the limit, the Roth TSP is a smart choice for your combat-zone TSP contributions since withdrawals of contributions -- and earnings -- are tax-free."
Filing extensions and more. When you're fighting for freedom, your tax return is probably the last thing on your mind. You can't put off filing taxes forever, but you may qualify for a deadline extension for several tax-related actions, including:
Help for spouses. Before 2009, military spouses generally had to pay income taxes to the states where their spouses were stationed. But, the Military Spouses Residency Relief Act changed all that. Now, military spouses don't have to pay income taxes to a state that's not their legal residence just because their family is stationed there.
"That could generate big savings if the legal residence has lower tax rates -- or no income tax at all," Montanaro notes. "But that's not all: If the spouse had income tax withheld in the state he or she is living in, filing a return in that state may result in a refund."
Remote filing. Joint returns usually must be signed by both spouses. But if military duties keep you away from home, your spouse can use a power of attorney to file a joint return on your behalf.
A break when selling your home. Taxpayers, whether civilian or military, can generally sidestep paying capital gains taxes on the sale of a home if they owned and used it as their principal residence for two of the five years before the sale. This rule can be used to exclude up to $250,000 in gains for individuals or $500,000 for married couples.
Military members get extra help when it comes to satisfying the two-out-of-five-years test. They're allowed to suspend the five-year test period for up to 10 years when they're on qualified extended duty -- that is, assigned to a duty station that's at least 50 miles from their homes for 90 days or more. In effect, they can disregard the time they were ordered away from their home. The rules concerning this get a little tricky; learn more at the IRS website or consult a professional tax advisor.
Moving deductions. Moving every few years can be expensive. But if your move is a required permanent change of station, the IRS lets you deduct the "reasonable unreimbursed expenses" of relocating yourself and your family. If your new job requires relocation, your moving expenses may be deductible. Check out IRS Publication 521 for more details about moving-expense deductions.
Separation assistance. If you're transitioning back to civilian life, you may be able to deduct some of the costs you incur while looking for a new job. Qualified expenses may include:
Travel deductions. If you're called more than 100 miles away from home to perform Reserve duties, you can generally deduct any unreimbursed travel expenses.
Save on uniforms. If the military prohibits you from wearing certain uniforms when off duty (a rule that usually applies to reservists), you can generally deduct the costs to buy and maintain those uniforms. But you must reduce your expenses by the amount of any uniform allowance or reimbursement you receive.
Waived penalties. A call to active duty sometimes creates a financial hardship for reservists. If the reservist addresses the hardship by withdrawing funds from their retirement savings, the IRS may provide accommodation.
"You might be able to take money from your IRA, 401(k) or certain other retirement plans without the 10% penalty tax normally applied for withdrawals before age 59½," Montanaro says. "You'll still have to pay income tax on the distribution, but without the extra sting of the penalty."
Check out the IRS website for more information on financial hardships.
On base. Most military installations offer tax help to service members and their families through the Volunteer Income Tax Assistance Program. "VITA's volunteers are trained and certified by the Internal Revenue Service, and those working at our on-base sites understand military-specific tax issues," says Kimberly Pine, a VITA volunteer coordinator. "Best of all, their advice and tax preparation services won't cost you a penny."
Online. For complete details, download IRS Publication 3, Armed Forces' Tax Guide, which summarizes many important military-related tax topics. Publication 3 may also be ordered by calling 1-800-TAX-FORM (800-829-3676).
With tax season in full swing, you should take note of the many deductions and credits available to you because of your military service; whether on active duty or on reserve.
Although going back to school can be a pricey venture, military servicemen and women should keep in mind that their military status makes them eligible for certain education benefits.