Best Tax Practices for Military Members
When you're serving your country, you have access to a number of tax benefits that aren't available to civilians. Take advantage of these while you're a member of the military, as they can make a significant difference in your taxes and long-term savings. Here are a few that will help minimize your tax burden so you aren't owing Uncle Sam.
Maximize Retirement with Combat Pay
The Thrift Savings Plan is already considered one of the best retirement plans out there, and it's available for all military members and government employees. While it features many of the same benefits civilian plans do, the TSP provides simplicity in use with low-fee funds that help contributors pay less in fees, which can take an invisible bite out of your retirement.
If you're deployed to a combat zone, one way to maximize your retirement savings is put that into your TSP account or Roth TSP account. Combat pay is already mostly tax-free and will lower your overall tax burden for the year. By putting it into your retirement account, your money goes in tax-free and comes out tax-free. That's a great bargain, one of the few you'll find in taxes! With combat pay, you can contribute up to $51,000 in your TSP account and $17,500 for the Roth TSP account.
If you are deployed domestically or internationally, you can still claim residency in your home state. Members of the military do not need to satisfy the same requirements for residency as civilians, since they are often deployed elsewhere and spend large amounts of time away from home. If you have permanent residency in a tax-free state such as Texas or Florida, that will help you lower your overall tax burden.
Selling Your Home
If you moved recently, you may have had to sell your home. If you lived in the home you sold for two of the five years preceding the sale, you can usually avoid paying capital gains tax on the sale. That goes for if you're a civilian or military taxpayer. It allows you to exclude up to $250,000 in gains (for individuals) or $500,000 (for married couples).
Since military service members are often on extended duty away from home, they can suspend the five-year period for up to ten years. If you were assigned to a duty station at least 50 miles away for a period of 90 days or more, you can effectively disregard the time you were assigned away from home. The taxes involved with this calculation can be complicated, so check with your trusted tax advisor or the IRS.
Moving Tax Breaks
Moving is a necessary evil when it comes to the military lifestyle. Since it places a tremendous financial burden on families, you can deduct any unreimbursed expenses if you are moving because of PCOS (Permanent Change of Station) orders.
File Your Taxes for Free
Don't forget, you may be able to file your taxes for free. You can file your taxes for free on base with help from a volunteer tax corps. If you make less than $58,000, you can file with Free File with the IRS. If you used software providers to file your taxes during your civilian life, you can continue to do so with H&R Block (through Military OneSource) and Turbo Tax. They both have specialized military versions of their software to help you make the most out of your taxes. And if you need help saving up to pay your tax bills, check out the ReadyForZero resource centers, which you can view here.
Fiona Lee is a personal finance writer for ReadyForZero, a website that helps people get out of debt faster on their own. She is a frugalista who loves discovering new ways to save money, especially in expensive cities. After living in New York and Beijing, she now makes her home in San Francisco. You can follow @ReadyForZero and @moderntime on Twitter.
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