An Intro Guide to Military Taxes

Did you know your service might benefit you when filing your state and federal taxes? Active duty service members, veterans, and military spouses are all eligible for a number of military tax deductions that can result in significant savings on your tax bill.

Residency status and your taxes

If you have to move for the military, you might have some questions about your residency status and how it impacts your taxes.

As a military member, you’re generally taxed based on your state of legal residence as opposed to where you’re stationed, even when you’re deployed. If your declared residency is in one state, you can continue that legal residency even if you and your family are transferred to another state. That’s a real benefit for members from a tax-free state such as Texas or Florida.

The rule used to apply only to service members, but since 2009, military spouses have been able to maintain their state of residency, too. One thing to keep in mind is that if your spouse is employed in the state in which your family is stationed, and state income taxes are withheld, a tax return will need to be filed in that state to recoup those taxes.

Income tax requirements

Military service members generally pay state income taxes and federal income tax on basic pay, bonuses, and most special payouts. That said, some types of income you might receive during your service are taxed differently.

For example, combat zone pay is one of the most notable military tax benefits as it ensures the additional income earned in designated combat zones isn’t subject to federal income tax for eligible members of the US Armed Forces.

Deadlines for military personnel

Military service members have access to numerous extensions, deferments, and other benefits. If you need more time to familiarize yourself with tax requirements and exceptions you’re entitled to, it may be worthwhile to take advantage of the filing extension.

• Standard service: Military members or support personnel in the US can receive an extra 180 days (about six months) to file their federal tax return by submitting IRS Form 4868. 
• Outside US or Puerto Rico: If you’re on active duty outside the US or Puerto Rico, you automatically qualify for a two-month extension, and there is no need to file for an extension. But if you’re unable to file before the deadline, you can also request an additional four-month extension using Form 4868.
• Combat zones: Military members serving in combat zones or contingency operations qualify for an automatic extension to file a return, pay taxes owed, or file a claim for a refund. 

Keep in mind that filing and paying taxes are two separate things. If you owe taxes, the IRS will charge an interest rate starting from the date the payment was due, unless you make your payment by the original filing deadline.

Do military members get any tax breaks?

The government recognizes your sacrifice and rewards you with tax breaks, such as:

1. Combat pay

If you’re serving in a combat zone, your pay will be tax-free, which is great news. If you’re a military officer, your tax-free pay may be subject to a cap. 

For your combat pay to be excluded from taxation, your compensation must have been accrued when:

• Serving in a designated combat zone
• Hospitalized as a result of wounds, disease, or injury incurred while serving in a designated combat zone

Even if your combat pay isn’t taxable, don’t overlook the Earned Income Tax Credit on your tax return. Your pay may qualify you for this valuable tax credit.

 2. Moving and storage expenses

Unlike civilians who can no longer deduct moving expenses for a job under tax reform, active duty personnel can deduct moving expenses they incur in connection with a permanent change of station.

If you’re filing taxes after moving, make sure to account for any eligible expenses when calculating your write-offs.

3. Travel allowances

Travel allowances aren’t taxable either, including:

• Transportation for you and your family during ship inactivation
• Per diem travel allowances
• Leave between overseas tours
• Space-available travel on government aircraft
• Round–trip travel for dependent students

4. Retirement plan withdrawals

While most of the time, you’ll receive a penalty for making early withdrawals to your retirement plan funds, military reserve members who are called to active duty can generally take early withdrawals without penalty. 

Under IRS rules, this is considered a “qualified reservist distribution,” which means military reserve members can access funds in their IRA or 401(k) without incurring the usual early withdrawal penalty, but you’ll still owe income tax on the amount withdrawn.

5. Other pay tax breaks

If you receive uniforms or a uniform allowance, that isn’t taxable income to you. Neither are:

• Moving and storage expenses provided by the government
• Legal assistance
• Commissary discounts
• Professional education
• Survivor benefit and life insurance premiums
• Basic allowances for housing and assistance

If you’re a student in the ROTC, you don’t have to pay tax on the allowance that you receive for your participation in advanced training. This rule doesn’t apply to any active duty pay that you receive.

6. Other deductions on your tax return

If you’re in the National Guard or military reserve, you may be able to deduct your travel expenses, including:

• Meals
• Lodging
• Transportation

Note that you’re only eligible for these write-offs if you travel more than 100 miles from home and are away overnight. The cost of military uniforms that aren’t worn off-duty, including their cleaning and upkeep, also are deductible, reduced by any uniform allowance that you receive.

Tax tips for military members

Get the most out of your taxes this season with our tips and strategies to maximize military tax deductions for active service members.

Plan ahead for tax time

Get the most out of your tax deductions next year and make it easy on yourself with tax planning, starting with staying organized. Start a folder for important documents, financial records, and receipts to make filing easier and get a jump-start on tax prep.

Know which states tax military retirement benefits

When it comes to military retirement pay, your pension benefits almost always count as taxable income, but the decision of whether or not to tax military retirement pay is left up to the states. 

While some states choose to tax this income fully, and some impose a partial tax, twenty-six other states don’t include military retirement pay in state income taxes. Not only is it nice to feel acknowledged for your service to your country, but it can also make it more beneficial to retire in one of these states.

These are the states that don’t currently tax military retirement pay:

• Alabama
• Arizona
• Arkansas
• Connecticut
• Hawaii
• Illinois
• Indiana
• Iowa
• Kansas
• Louisiana
• Maine
• Massachusetts
• Michigan
• Minnesota
• Mississippi
• Missouri
• Nebraska
• New Hampshire
• New Jersey
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Pennsylvania
• Wisconsin 

Extend your tax deadline if needed

Military service members have access to numerous extensions, deferments, and other benefits. If you need more time to familiarize yourself with tax requirements and exceptions you’re entitled to, it may be worthwhile to take advantage of the filing extension.

• Standard service: Military members or support personnel in the US can receive an extra six months to file their federal tax return by submitting IRS Form 4868. 
• Outside US or Puerto Rico: If you’re on active duty outside the US or Puerto Rico, you automatically qualify for a two-month extension, but if you’re unable to file before the deadline, you can also request an additional four-month extension using Form 4868.
• Combat zones: Military members serving in combat zones or contingency operations qualify for an automatic extension to file a return, pay taxes owed, or file a claim for a refund. 

File your taxes for free

Through our TurboTax Intuit Military and Veteran Initiative, we’re proud to offer free filing for active duty and reserves for federal and state taxes if you’re of an enlisted rank (E1 – E9) with a W-2 from DFAS.

This includes TurboTax Free Edition, Deluxe, and Premium. Simply enter your W-2 and verify your military rank when prompted, and your discount will be applied when you’re ready to file. You can still file for free even if you’re filing jointly with a non-military spouse. 

This offer isn’t valid for commission officers, warrant officers, veterans, retirees, or the National Guard.

Don’t worry about knowing these tax rules for military members. TurboTax will ask you questions about you and give you the tax deductions and credits you’re eligible for based on your answers. If you’re in the military, you may also be able to file for free or at a discount with TurboTax.