As troops sit down to file their 2018 income tax returns, the Defense Department wants them to know that some significant changes in tax law could put more money in their pockets.
But to maximize their refund, they should know about several new rules.
The Tax Cuts and Jobs Act of 2017, the Veterans Benefits and Transition Act, the Combat Injured Veterans Tax Fairness Act and DoD policy changes all have affected the tax code as it applies to military personnel, explained Army Lt. Col. David Dulaney, executive director of the Armed Forces Tax Council during a phone call with reporters on Friday.
The good news, Dulaney said, is that most service members "should see a substantial reduction in the overall federal taxes for 2018, even if their itemized deductions are suspended or capped because of changes in tax code."
Increased standard deductions and reduced tax rates, introduced in late 2017 by the Tax Cuts and Jobs Act, affect nearly all service members, and a doubling of the child tax credit will help those with children, Dulaney said.
"Most of our military families will see a substantial reduction of their overall tax liability," he said.
Several other changes apply to specific populations within the military community, Dulaney said. Here are some of the changes that apply:
Sinai Peninsula Service
Troops who served in the Sinai Peninsula as far back as June 9, 2015, qualify for a combat tax exclusion that allows them to file an amended tax return to receive a refund on taxes they paid while in the region.
Starting in 2015, service members assigned to the Sinai Peninsula began receiving imminent danger or hostile fire pay. But although the locale was considered a hazardous duty assignment, it was not considered a combat zone, so troops still were required to pay taxes on their base pay and certain other specialty pays while assigned there.
The 2017 Tax Cut and Jobs Act stipulated that the Sinai Peninsula is considered a combat zone, so anyone serving in the region back to mid-2015 can apply for a tax refund. Dulaney said about 900 service members a year have served in the area, making roughly 3,000 troops eligible for a refund.
The IRS provides details for how to file a claim on its website.
Spouse Residency Declaration Changes
The 2018 Veterans Benefits and Transition Act allowed military spouses to choose their active-duty service member's legal residence for state and local tax purposes, as well as voter registration, even if the spouse has never lived in the state.
This means that for some working spouses, they may be eligible to receive a partial or full refund for state taxes they paid in 2018 at the locale where they worked if their spouse is from a state with no income tax or a lower income tax rate.
Under the Servicemembers Civil Relief Act, troops can maintain legal residence in a state as they move elsewhere on military orders. This lets them retain their voting rights in the state they claim as their legal residence, keep their driver's license and car registration and pay taxes.
Before VBTA, spouses could declare the same state as their service member's legal residence but they had to have lived in the state at some point.
The new rule means that spouses who work can receive their entire 2018 state income tax back or a portion if their service member's legal residence is a state with no state income taxes, such as Texas or Florida, or if the state has a lower income tax rate than the state in which the spouse worked.
To get the refund, spouses who want to change their residency will have to file two state income tax forms -- one to the state where their service member is a resident and one to the state where they actually paid taxes.
Dulaney advised, however, that military couples go to their base legal assistance offices for help in making the decision. He said military personnel should make sure they are actually legal residents of the state they have declared. "[Troops] move around so much, sometimes you end up with a driver's license in one state, registered your car in another state, vote in another state. It becomes a jumbled mess of what exactly is your state of legal residence," Dulaney said.
2016 Combat Injured Veterans Tax Fairness Act
Roughly 133,000 combat-injured veterans paid taxes on their disability severance pay when they shouldn't have. Those veterans qualify for refunds on the taxes they paid and should have received a letter last July from the IRS instructing them on how to file a claim for their money.
They have a year from the date of their letters, which went out in July, or three years after filing the tax return that reported their disability severance pay -- whichever is later -- to file a claim.
Veterans who paid taxes on disability severance pay back to Jan. 17, 1991, are eligible for refunds. With the understanding that many of these veterans do not have copies of their applicable tax records or income documentation dating back nearly 30 years, the IRS approved standard refunds based on the year in which the DSP was paid. For veterans who received DSP between 1991 and 2005, the amount is $1,750; for those who received it from 2006 to 2010, it's $2,400; and $3,200 for those who earned it from 2011 to 2016.
Veterans may qualify for larger refunds if they have paperwork to support their claim. "We encourage those veterans who received those letters to seek help from a tax professional," Dulaney said.
While the 2017 Tax Cut and Jobs Act eliminated deductions for unreimbursed moving expenses for civilians, military personnel are not included, meaning service members can still deduct moving expenses that aren't reimbursed.
Qualifying expenses include lodging during a move and moving-related expenses such as shipping a car or a pet if those expenses weren't reimbursed.
Before the Tax Cut and Jobs Act was signed by President Donald Trump, Reserve members could deduct travel expenses incurred while reporting to duty -- an above-line deduction if they traveled 100 miles or more to duty and an itemized deduction if they went less than 100 miles. Now, with the suspension of miscellaneous itemized deductions, Reserve members cannot deduct expenses for traveling less than 100 miles.
Also eliminated this year was the opportunity for Marines to take an itemized deduction for wear and tear of their uniforms. Marines were the only service that qualified for this deduction, as they aren't allowed to wear their uniforms while not on duty. Again, with the loss of miscellaneous itemized deductions, Marines will no longer be able to make these claims.
"But again, bottom line is the increased standard deduction, the reduced tax rates and doubling the child tax credit will make it so military members will see an overall reduction in their tax liability," Dulaney said.
Taxes can be daunting, but help is available, Dulaney said. The Defense Department offers in-person tax counseling through the Volunteer Income Tax Assistance program available on many bases. With VITA, persons trained and certified to assist troops, retirees and family members with the tax nuances of military pay provide free counseling and assistance with filing federal and state tax returns. Dulaney recommended going to Military OneSource to determine which bases offer VITA.
Military OneSource also provides tax filing support to active-duty military, their family members and transitioning troops up to a year after leaving service. Through Military OneSource's MilTax portal, eligible users can access tax preparation and electronic filing software and connect with trained tax advisors for assistance.
-- Patricia Kime can be reached Patricia.Kime@Military.com. Follow her on Twitter @patriciakime.