Taxes are one of the certainties of life. However, servicemembers have access to a number of tax advantages that can make taxes less overwhelming. As you’re preparing to file taxes, remember that you can:
1. Exclude combat pay. You may be able to exclude Active Duty pay, your reenlistment bonus and more from your taxable income if you were serving in a combat zone at the time. These exclusions apply to enlisted members, warrant officers and commissioned warrant officers, although commissioned officers have exclusions capped at the highest rate of enlisted pay.
2. Contribute to and withdraw from a Roth IRA tax-free. Ordinarily, when you contribute to a Roth IRA, you pay taxes immediately and withdrawals are tax-free, provided you meet certain conditions, such as holding the account for at least five years and being at least age 59½ when you start distributions.* However, if you’re receiving tax-free combat-zone pay, you can contribute and withdraw that money without being taxed—it’s like a double tax break!
3. Deduct moving expenses. If you were required to make a permanent change of station, then you can deduct “reasonable unreimbursed expenses” incurred when relocating yourself and your family. Expenses may include trailer rental, packing costs and travel expenses from your old to your new home (including lodging but excluding meals).
4. Choose which state to be taxed in. Active Duty servicemembers who are relocated and their accompanying spouses can choose to keep their prior residence for tax purposes. This can provide big savings if your former residence is in a state with nonexistent or lower income tax compared to where you are relocated.
5. Extend your tax deadline. Certain servicemembers can postpone their tax filing deadline. Those stationed abroad are allowed an automatic two-month extension to file a return. Some military members, such as those serving in a combat zone, generally can receive an extension for the period of service plus 180 days after the last day in a combat zone. To use an extension, attach a statement to your return explaining which situation qualifies you.
6. Deduct civilian life costs. Should you leave the military, you may be able to deduct the costs of your job search. This can include the costs of travel, résumé preparation and job placement agency fees.
Once you’re ready to file your taxes, you can usually find free tax preparation and filing services on military bases. Continue to take advantage of tax breaks by contributing to the various retirement plan options available for servicemembers. Click here to learn more about your options at Navy Federal Credit Union.
*Premature withdrawals from an IRA will be taxed at ordinary income tax rates and are subject to a 10 percent IRS penalty.
This article is intended to provide general information and shouldn't be considered tax advice. Please consult a tax professional for more information.