Tax obligations are a well-known responsibility for all Americans, and this includes those serving in the military. But what happens to these tax duties when a service member is deployed overseas? Are they still obligated to pay income taxes?
This article aims to shed light on the complexities of military taxation during deployment, providing a comprehensive guide for those who find themselves in this unique situation.
- 1 Understanding Military Compensation Components
- 2 Do Service Members Pay Taxes?
- 3 Taxable vs. Non-Taxable Income
- 4 Tax Filing Status for Service Members
- 5 Combat Zone Tax Exclusion (CZTE)
- 6 State Taxes During Deployment
- 7 Tax Planning Tips for Deployed Service Members
- 8 Conclusion
- 9 FAQs
Understanding Military Compensation Components
How much does one make when they’re working in the US military? It depends. Military members receive different types of pay. Regardless of their rank or station, every person on active duty receives what is called basic pay. This compensation is the main component of a person’s salary.
Allowances are considered the second most significant component of military pay. Allowances are cash provided for specific needs, like housing or food. Monetary allowances are provided to soldiers when the government does not supply that particular need.
Let’s say that government housing in a certain city isn’t sufficient enough to house all service members and their families. Military persons who reside in government housing do not receive full housing allowances. Meanwhile, those who do not live in government housing receive allowances to help them afford commercial housing.
The most common types of allowance that soldiers receive are Basic Allowance for Subsistence (BAS) and Basic Allowance for Housing (BAH). BAS intends to offset a soldier’s meal costs. The allowance received is based on the military’s historic origins, in which the Department of Defense provides for the room and board as part of a person’s compensation package. It should be highlighted that this allowance is not meant to provide for military family members’ meals.
Meanwhile, BAH provides service members equitable housing compensation. This depends on housing costs in civilian housing markets in the US when there are no government-provided quarters. It should be noted that BAH isn’t intended to cover service members’ entire housing expenses. Each member of the armed forces is given the freedom to spend their allowances however they would like.
The other type of pay that military personnel can receive is referred to as special and incentive pay. This is provided after a person has rendered specific requirements or participated in certain events. For example, aviators and parachutists receive special pay. Special pay is also provided for people engaged in dangerous duties.
Do Service Members Pay Taxes?
Yes, deployed service members are required to file their taxes like every other American. However, given their circumstances, the Department of Defense provides assistance for them to file their taxes conveniently without any penalties. There are also some exclusions worth noting which we will discuss below.
Taxable vs. Non-Taxable Income
If you’re US armed forces member on active duty, in general, you’re not required to pay federal income taxes on all the income you obtain. What can and cannot be taxed depends on the income form, and in particular cases, how it’s earned. Basically, basic pay, bonuses and special pay are subject to federal income tax. Meanwhile, in-kind benefits, allowances and reimbursements are not taxable or are considered tax benefits.
Here’s a quick list of military compensation that can be taxed:
- Basic pay. This must include a person’s gross income for federal income tax purposes. However, service performed in combat zone is exempted. Basic pay includes compensation receive for active duty (active duty pay), attendance at a particular designated service school, drills and reserve training.
- Special pay. Like basic pay, special pay can be taxed by the federal government unless it’s earned from a combat zone. Special pay may include money received for foreign duty, hardship duty, and imminent danger pay.
- Bonuses and other payments. Unless this is received from a combat zone, military members are required to include the bonuses they receive on their federal income tax returns.
In a nutshell, these are the kinds of compensation you don’t need to include while filing taxes:
- Living allowances, which include BAH, BAS, and Overseas Housing Allowance or OHA.
- Allowances received for moving your household, personal belongings, storing one’s items in storage, and temporary lodging.
- Certain travel allowances for students dependent on the service members, per diem expenses, and leaves between consecutive overseas tours.
- Payments for uniform allowances, professional education, or group term life insurance.
- In-kind benefit value, which includes legal assistance, commissary discounts, uniforms furnished to enlisted personnel, and medical care.
- Benefits obtained under a dependent-care assistance program.
Tax Filing Status for Service Members
If you’re part of the US military, you’re probably taxed based on the state of your legal residence as opposed to where you’re stationed in. Filing taxes while you’re deployed on active duty would depend on your state of residence, too.
For military personnel to establish legal residence in a particular state, you should provide proof you live in that state. Every state has their own state taxes, and simultaneously, they have their rules to proving your intent to legally reside in a state.
Here are some proof which can be helpful with earned income tax credit:
- Applying or keeping your driver’s license
- Registering your personal vehicles
- Paying state taxes like, income tax
- Registering to vote in that state
As discussed, deployed members of the armed forces are still required to pay their taxes. However, these people receive special treatment like extensions and tools to make it easier for them. The taxes they pay depend on their state of legal residence.
Combat Zone Tax Exclusion (CZTE)
Another interesting topic to note when discussing taxes and the armed forces is the Combat Zone Tax Exclusions (CZTE). People who are covered the CZTE receive tax benefits for their duty for the country. But what counts as a combat zone?
In a nutshell, a combat zone is any area that the US president designates by Executive Order as a zone where US armed forces are engaged or have engaged in combat. As an active member of the military, you have the option to exclude from gross income partial or full taxable military compensation if it is given during a month (or part of a month):
- while you’re engaged at a combat zone
- while you’re hospitalized because of a wound, injuries sustained or disease obtained during your service in a combat zone
It should be noted that these tax benefits don’t apply for any hospitalization month that begins more than two years post-end of combat activities. You’re only recognized as working in a combat zone if you’re assigned to that place on official temporary duty or you qualify for imminent danger pay while stationed there. Moreover, your service period on a combat zone includes any period of absence because of sickness, wounds or on leave.
All your military pay can be excluded from gross income if you’re an enlisted member, warrant officer, or commissioned warrant officer and you meet the combat zone exclusion eligibility requirements. However, if you’re a commissioned officer, the amount of pay you can exclude from your gross income is limited to the highest rate of pay for an enlisted person, plus any imminent danger you receive.
How can you make this exclusion official to the internal revenue service or IRS? The wages shown in box 1 of Form W-2, which is given by your military branch, shouldn’t include any military pay excludable from your gross income under the combat zone exclusion provisions. If you think that you qualify for the exclusion, you would need a corrected Form W-2 from your finance office.
State Taxes During Deployment
As mentioned, you’re required to abide by the tax laws of the state of your legal residence. If you’re deployed, there are various tools and resources that can help you perform this duty. For example, the myPay website enables you to obtain your military W-2 form. You would need your personal identification number or Common Access to Card to sign into this website.
If you’re stationed away from your permanent home address, in most cases, you’ll still be required to abide by tax laws. On the other hand, military spouses that live with the service member other than their home state may not be required to pay income tax in the state they’re working at.
If your spouse or someone else is filing your tax return, you should ensure they have all your information and that you both have copies of a power of attorney. This document certifies that they’re authorized to file your taxes on your behalf.
Tax Planning Tips for Deployed Service Members
How can you ensure that you file your taxes as a service member deployed elsewhere? First, you should make it a habit to do recordkeeping of all your expenses during your deployment. Moreover, you should consider the tax benefits you’re provided given your deployment orders.
Some deployment-related deductions you should keep in mind as you file your taxes include your travel expenses, uniform expenses, and Home of Record (HOR) considerations. If you have any questions regarding direct support or enlisted pay, you shouldn’t hesitate to ask for help. The Volunteer Income Tax Assistance Program provides assistance with military tax issues for people deployed overseas.
Serving in the armed forces may offer specific tax advantages, but it doesn’t absolve you from fulfilling your tax responsibilities entirely. If you find the process of filing taxes daunting or confusing, there are resources and professionals available to assist you. Gaining a thorough understanding of your tax obligations can save you both time and potential legal complications.
To learn more about life in the military and active duty status verification services, explore the SCRA website further.
Do I have to pay state taxes while deployed?
You can utilize the myPay website to learn how much taxes you need to pay. You may also have someone else file your taxes through a power of attorney.
Are deployment allowances taxable?
No, in general, allowances are non-taxable direct support from the Department of Defense. These are consider tax benefits for service members.
How do I file taxes while stationed overseas?
You can file your taxes through a third party with a power of attorney. If you want to do it yourself, you should gather all the documents you need to file your taxes as per usual.