Tax Tips for Active Duty Military Personnel, Spouses and Veterans

March 29, 2010 –

Active Members of the Military

 

For those who are currently on active duty in the military, the pay of enlisted personnel and warrant officers serving in combat zones is tax-free, as is commissioned officers' pay up to certain limits. Those who are injured and hospitalized do not pay tax during their hospitalization, within certain guidelines.

Extended time to file and pay their taxes is allowed for military personnel who serve in designated combat zones and civilians who serve in support of them, or those who are hospitalized outside the U.S. as a result of an injury received in a combat zone. They do not have to file or pay taxes until 180 days after their last day in the combat zone or of hospitalization. The extension also generally applies to the spouses of military personnel who are serving in combat zones.

Active duty members of the military who die in a combat zone, or die from wounds or disease received in a combat zone, or in a terrorist or military action, can have their taxes forgiven for the year in which they died and perhaps for earlier years.

More information can be found in IRS Publication 3, "Armed Forces' Tax Guide," which is available online. Visit www.irs.gov, then click on "Individuals" and look for "Tax Information for Members of the U.S. Armed Forces," or call the IRS free at (800) 829-3676 and ask for a paper copy. Live telephone assistance is available from the IRS by calling (800) 829-1040.

Military Spouses

 

A new law grants military spouses the same type of protection from state taxation as active military personnel when they live in a state solely due to government orders. Beginning in 2009, the military spouse is entitled to retain his or her state of legal residence (for both income and personal property tax purposes). In addition, the new law prohibits a military spouse's income from being taxed in a state if the spouse is not a resident of that state.

Veterans Pay is Taxable, but Not Benefits

 

Military retirement pay that is based on age or length of service is taxable, and must be included in income. On the other hand, veterans' disability retirement payments received from the U.S. Department of Veterans Affairs are generally tax-free. Benefits for veterans administered by the department are not considered income. Veterans' benefits include:

1. Education, training and subsistence allowances paid to veterans or their families;
2. Disability compensation and pension payments for disabilities paid to veterans or their families;
3. Grants paid by the Department of Veterans Affairs for homes designed for wheelchair use or for vehicles for veterans who have lost their sight or the use of their limbs;
4. Veterans' insurance proceeds and dividends paid to veterans or their beneficiaries;
5. Interest on insurance dividends left on deposit with the Department of Veterans Affairs;
6. Dependent-care assistance benefits; and
7. Death benefits paid to survivors of military personnel members who died after Sept. 10, 2001.

Home Purchase

 

Some taxpayers are eligible to receive a refundable tax credit on the purchase of a home. New homebuyers (i.e., individuals who have not owned a home in the last 3 years) can receive a credit for 10 percent of the purchase price up to $8,000. Long-term residents (i.e., individuals who have owned a home five out of the last eight years) can

receive a credit up to $6,500 on a purchase. These credits are generally available if you have a binding contract by April 30, 2010 and close by June 30, 2010. Military individuals serving overseas (for at least a 90 day period) are eligible for the credits through April 30, 2011 (provided the closing is by June 30, 2011).

Generally, taxpayers must pay back the credit if they sell the home or move within three years of the purchase. However, military individuals who move pursuant to government orders on or after Jan. 1, 2009 are exempt from the pay-back requirement.

Keep Military Records

 

To qualify for benefits and to verify status as a veteran, access to military records may be needed. Find information on obtaining those records at the Department of Veterans Affairs Web site at http://www.va.gov/vaforms/.

A CPA Can Help

 

Turn to a CPA for advice about tax and financial help available to veterans, active military members and their families. He or she can provide the answers needed to ensure veterans and loved ones receive the appropriate tax relief.

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Copyright 2010 The American Institute of Certified Public Accountants