For the thousands of members of the U.S. Armed Forces who currently serve in combat zones, there are several beneficial IRS provisions regarding the filing of annual income tax returns.
Here's a summary of key issues that military men and women should bear in mind:
Qualifying for combat zone status is fairly straightforward. Each year, the IRS makes a list of current combat zones available as part of IRS Publication 3, Armed Forces - Tax Guide. A servicemember is considered to serve in a combat zone if he or she is stationed on temporary duty in a qualified combat zone, or if he or she is eligible for hostile or imminent danger pay while in this location.
Once combat zone status has been determined, the first step is to review how this kind of pay is treated when it comes to taxes. Combat pay is considered nontaxable income on a tax return and is reported in Box 12 (code Q) of Form W-2, Wage and Tax Statement. Although this income is nontaxable, it can be included when calculating certain tax benefits, such as the Additional Child Tax Credit, the Earned Income Tax Credit (EITC), and the credit for Child and Dependent Care Expenses -- a consideration that is especially important for working families. These credits allow both military and non-military taxpayers to decrease the amount of tax they owe and increase the amount of their tax refund, if they're eligible.
With regard to the EITC, members of the Armed Forces who have nontaxable combat pay can elect to include this income as part of the EITC calculation. The EITC amounts are:Earned income and adjusted gross income (AGI) must each be less than:
|If filing...||Qualifying Children Claimed|
|Zero||One||Two||Three or more|
|Single, Head of Household or Widowed||$14,820||$39,131||$44,454||$47,747|
|Married Filing Jointly||$20,330||$44,651||$49,974||$53,267|
Maximum Credit Amounts
The maximum amount of credit for Tax Year 2015 is:
- $6,242 with three or more qualifying children
- $5,548 with two qualifying children
- $3,359 with one qualifying child
- $503 with no qualifying children
The Additional Child Tax Credit is a refundable tax credit for taxpayers with children who can not claim the full Child Tax Credit. Military taxpayers must include their nontaxable combat pay in earned income when calculating both of these credits.
The credit for Child and Dependent Care Expenses is a credit based on the expenses paid for child care while the taxpayer, and their spouse, worked or went to school. Military taxpayers may elect to include their combat pay in the earned income calculations when determining their credit amount.
Furthermore, nontaxable combat pay is considered earned income for the purpose of contributing to an individual retirement account (IRA). Taxpayers can contribute up to $4,000 or the total amount of their earned income for the year, whichever is less.
Finally, taxpayers who are overseas on the official April 15 deadline automatically receive a two-month extension to file their tax returns, and for those located in a combat zone, the extension time is even greater. Taxpayers stationed in combat zones have 180 days after they leave the zone to file, and these days are added to the number that were available to them at the point that they entered the combat zone.
For example, if you enter a combat zone on April 10 -- five days before the tax filing deadline of April 15 -- you had five days remaining to file your tax return. These five days are then added to your 180-day extension, affording you 185 days after you leave the combat zone to file your tax return. This extension applies to the deadline for filing an annual tax return, paying any tax due, and filing a claim for a refund.
Reservists and National Guard members who were called to service in a combat zone after Sept.11, 2001, and before Dec. 31, 2007, and who will be on active duty for more than 179 days, have additional benefits regarding some of their retirement planning options. These include being able to remove funds from their IRA or 401(k) accounts without being subject to the 10 percent early withdrawal penalty.
The tax implications of serving in a combat zone are substantial. For many, they are also confusing. To understand the provisions better, military personnel may want to consult with a professional tax preparer to ensure they receive all of the benefits they deserve as proud members of the U.S. Armed Forces.
*Taxpayers who file as Married Filing Separately are not eligible for certain tax benefits, including the Earned Income Tax Credit.
Resources: IRS Publications 3, 17, 596; Form 8812 instructions