Many service members and their families qualify for special tax breaks, such as combat pay, tax-exempt allowances, residence flexibility, and more. However, eligibility can get a bit tricky according to experts.
Collin Lyon of Anderson Financial Strategies said that many service members know portions of their income aren’t taxable, but they aren’t sure which parts those are.
For example, the Servicemembers Civil Relief Act (SCRA) allows active duty service members and their spouses to choose their tax domicile. Regardless of where they’re stationed, service members can keep residency in a state without income tax for their entire military career.
Service members also have tax-exempt allowances. While one’s pay is taxable, most allowances, including food and housing, are tax-exempt. These don’t get reported on one’s tax return, and one must track it themselves.
Moreover, service members who have served in a combat zone are excluded from paying taxes for the months spent working in the combat zone. According to the IRS, excluded income includes basic pay, student loan repayments, bonuses, and more.
On the other hand, hazard duty pay is still considered earnings for making Roth individual retirement account contributions. It also qualifies for an earned income tax credit.
If a service member is selling their primary residence, they can exclude a portion of the profits from capital gains taxes. The general limit is $250,000 for single filers and $500,000 for married couples filing jointly. However, you should meet the ‘use test’ by living in that property for two of the last five years before the place is being sold.
This rule doesn’t apply to active duty service members. Qualifying for the tax break is still possible even if one doesn’t meet the two-year use test. This is provided that the service member lived somewhere else while on qualified official extended duty. This suspension is limited to 10 years, as per the IRS. Acquiring evidence of active duty is essential for SCRA protections. SCRACVS can help active duty service members and other qualified individuals obtain the evidence they need for these tax breaks. Click here to sign up at SCRACVS and verify the active duty status.