Taxes Can Be Tricky for Military Families

Albert Einstein said, “The hardest thing to understand in the world is the income tax.” This sentiment is understood by military families everywhere as they try to navigate military-specific tax protections and laws. There are many tax advantages for military families, but there are also many tax questions.

One common question is whether or not you owe state taxes for the state you are currently working in (if you are not a resident of that state). Because of the Soldiers and Sailors Civil Relief Act of 2003, service members don’t need to change their state of residence for tax purposes just because of a change in station. This protection was extended to spouses in 2009 with the Military Spouse Residency Relief Act. You can make sure that you qualify for this protection by reading the requirements outlined here by militaryfamily.com.

Many military families are uncertain about what parts of their military pay is taxable. Generally, anything that is “pay” or “bonus” is taxable. Anything that is an “allowance” is not taxable. It is best to refer to the IRS Publication 3, Armed Forces’ Tax Guide to read the list of taxable and nontaxable pay. The laws can change, so what was true a few years ago might not be the same today.

If you changed stations this year and your expenses outweighed your allowance, you can deduct the excess amount from your taxes. Of course, you will need to prove that your expenses were more than what the government paid you. This is very rare, so make sure that your proof is well documented.

Military uniforms and their upkeep are deductible, but there is a qualifier for that deduction. The uniforms you are deducting must be uniforms that are not allowed to be worn when off-duty. So working uniforms and BDUs are deductible but “Class A” uniforms are not. 

Military members are exempt from the “ownership and use test” when excluding the gain on the sale of a home. The rules on this one are a bit complicated and there are many conditions that apply, but the following example from the IRS Publication 523 sheds some light on this exemption. 

John bought and moved into a home in 2003. He lived in it as his main home for two-and-a-half years. For the next six years, he did not live in it because he was on qualified official extended duty with the Army. He then sold the home at a gain in 2011. To meet the use test, John chooses to suspend the five-year test period for the six years he was on qualified official extended duty. This means he can disregard those six years. Therefore, John’s five-year test period consists of the five years before he went on qualified official extended duty. He meets the ownership and use tests because he owned and lived in the home for two-and-a-half years during this test period.

For military members, it really does pay to research and learn about the  exemptions. If you have questions, the best place to start looking for answers is the IRS website.