The Most Relevant Tax Breaks for Military Families
Military life is uniquely challenging for both the service member and their families. Fortunately, there are plenty of lucrative tax breaks that you can take advantage of through deployments or frequent moves. Here are the ones you should know:
- Combat Zone Tax Exclusion
- Home Sale Tax Exclusion
- Reservist Travel Cost Deduction
Understanding how to be eligible for these tax breaks will allow you to factor them in when making important life decisions (such as buying or renting at a duty station).
More importantly, it will allow the sacrifices you and your family make to create a brighter financial future by putting thousands of dollars into your pocket today.
Other Important Things to Know
We’ll also cover how to file an extension and where to file for free. These are relevant topics for almost every military family, so feel free to share this article with others who could benefit from it.
The information in this article is not specific tax advice and is educational in nature only. If you have specific tax questions consult a tax professional.
Tax Break #1: The Combat Zone Tax Exclusion
Deployments are a reality of all military careers. Deploying to a Combat Zone means your income is tax free for the period you are there. This allows you to save hundreds of additional dollars/month. For example, at E5 base pay (at 4 years) this amounts to over $400/month!
Where are the Combat Zones?
Military members are eligible if they are serving in one of the following regions and are receiving hostile fire/imminent danger pay. These regions are designated combat zones by executive orders and congressional designation.
Additional Ways to Be Eligible
- You are also eligible for combat zone exclusion if you are outside of a combat zone performing service in direct support of combat zone operations (as designated by the DOD) and receiving hostile fire/imminent danger pay.
- If you are wounded in a combat zone you will be eligible for the time you are hospitalized as a result of your wounds.
How to Get the Tax Benefits
Your benefits will be handled by the admin in your organization. They will be aware of when and how to apply for this exception. One important detail: if you are in a combat zone for 1 or more days of a given month, your income for that whole month is eligible.
Build Your Future: Combining Combat Zone Exclusion with the TSP
The limit for the TSP increases to $58,000/year ($4800/month) if you are in a combat zone.
It gets even better, if you contribute to a ROTH TSP you will be able to build tax free wealth with money that was never taxed. To see how powerful this is over a hypothetical nine month deployment, check out the video below:
Investing just $10,800 over the course of a 9 month deployment would net you over $400K by retirement. Thats a 37x return on each tax free dollar you invest!
It’s essential to plan for this prior to deployment. You need to make sure you are contributing to a TSP fund you are comfortable with. Additionally, our TSP calculator can help you determine a good monthly savings amount for your personal finances.
Enter the percentage of pay you want to save and see what it will be worth. We handled the rest.
Tax Break #2: Sale of a Primary Residence
Military life means you’re going to be moving often. Fortunately, the VA Loan is an awesome tool that allows you to buy homes as you go. When rotation time comes, most families face the challenging decision of whether to sell or rent out their current home. If you choose to sell, you can pocket thousands of dollars tax free on the gain.
Understanding the qualifications needed to do this is critical to avoiding a large tax bill. Additionally, it will help you when deciding to sell or rent.
How to Be Eligible For This
If you sell your house for more than you paid for it, that profit is called capital gains. The IRS exempts you from tax on the first $250,000 of gains (or $500,000 if married). In order to qualify, the following conditions must apply to you. The IRS refers to this as the Principle Residency Test.
1. Principle Residence
You can only have one principle home at a time. The home you owned and lived in during your current duty easily meets the criteria.
You and/or your spouse owned the home for at least 24 months of the five years leading up to the sale. If you’re married filing taxes jointly, only one of you needs to meet the ownership requirement,
If it’s been longer than five years, there’s a period of suspension which allows you (if you’re a service member) to extend this five year period. You need to have AD orders over 90 days that are either:
- At a duty station >50 miles from your principle residence
- Direct you to live in government quarters unders government orders (Training commands)
You (and your spouse) used the home as your residence for at least 24 months (730 days) out of the past five years. It doesn’t need to be consecutive but must add up to 730 days.
4. Look Back
You didn’t take an exclusion on the gain from the sale of another home for the 2 years leading up to the test. You can only do this once during any 24 month period.
Passing the Test
If these apply, you “passed the test.” The first $250K (or $500K) of profit will not be taxed. Keep in mind you still need to report this income on your return even though it’s not taxable. It’s as simple as including the 1099 Form you receive at closing on your return. H&R Block and other free filing software allow you to include this on your return.
Tax Break #3: Travel Expenses for Reservist
Many reservists have to travel to their place of training. Depending on where you live, this can constitute significant time and money. If you travel more than 100 miles away from home for performance of service you can deduct unreimbursed expenses from your taxes. This can lead to hundreds or thousands of additional dollars on your tax refund.
How To Do This
Though the instructions are thorough, we highly recommend consulting a tax professional if you intend to claim these deductions. As a good practice, save all receipts and itineraries for tax filing.
Where to File Taxes for Free
If you are planning on filing a simplified tax return there are multiple options to file for free. These include
We recommend H&R Block. MilitaryOneSource uses the exact same software but requires a CAC card to access it. H&R Block is also a lot simpler to work with than IRS Free File and retains your returns from previous years.
File For Free
Move taxes to the done pile and start worrying about how to spend your return.
If you have rental properties, sold cryptocurrency or want to deduct itemized expenses (such as a reservist deducing travel expenses) you’re going to need to pay for your return. You can still file quickly and easily through H&R Block but will need to pay for a higher level of the software.
For comparison, here’s what you can expect to pay with the most popular tax filing software:
- $49/ state filing
- $44.99/state filing
Because these softwares are extremely similar, we still recommend H&R Block if you need to itemize because it is the cheaper of the two.
When to Get A Professional
If you have multiple rental properties, a small business or just feel like you’re in over your head- hire a tax professional. They can be worth the fee. After acquiring a few rental properties I switched to using an accountant and my return almost doubled from the previous year.
We recommend that you use a certified tax accountant. They will be able to reduce your taxable income without getting you into trouble.
How To File an Extension
Tax extensions can be daunting, but they are often required for military families. It’s also more common than you may think, more than 16 million people are expected to get an extension this year. The process is straightforward and requires one form. You can file for an extension here.
This will give you an additional 180 days to file your taxes. If you know you need an extension, don’t wait- the IRS requires this to be filled out in a timely manner.
You will not receive notification if your extension is accepted. It will be automatically applied. Additionally, you need to estimate your taxes on the form. If you owe taxes you still need to pay your estimated amount owed while filing the form.
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