Tax Breaks for the Military

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The information in this article is up to date for tax year 2023 (returns filed in 2024).

As a member of the U.S. Armed Forces, you make a lot of sacrifices to serve your country. The last thing you need to worry about is your tax return. To help ease the load, the government offers service members special tax breaks, such as extended deadlines, pay exclusions, and various deductions. 

If you’re in the military, here are some benefits to keep in mind the next time you file your tax return.

Combat pay is not taxable

You do not have to include combat pay as income on your tax return. Enlisted members, warrant officers, and commissioned warrant officers can exclude all military pay earned while serving in a combat zone.  

This includes:

• Basic pay
• Reenlistment bonuses
• Imminent danger/hostile fire pay
• Student loan repayments
• Pay for accrued leave

Although your income will be excluded from federal taxes, it is still subject to Social Security and Medicare taxes.

Nontaxable income counts toward the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is worth up to $7,430 for tax year 2023, so claim it if you can. Members of the military can choose to have their nontaxable combat pay included to calculate their EITC. This can help you get a larger credit, resulting in a bigger tax refund. 

If your earned income without your combat pay is less than the amounts below, it may be beneficial to include it.

• $7,840 if you have no qualifying children
• $11,750 if you have one qualifying child
• $16,510 if you have two or more qualifying children

The IRS suggests calculating the credit both ways to make your decision. Don’t worry, even if you include your combat pay for the credit, it’s still nontaxable. File your taxes with ezTaxReturn, and we’ll do the math for you.

Some moving expenses can be written off

When you are in the military, you may have to move around a lot. If you move due to a permanent change of station, you can deduct some of the unreimbursed moving expenses for you and your family. Eligible expenses include the cost of moving household goods (not furniture) and travel from your old home to your new one.

Travel expenses are deductible for Reservists

If you are stationed more than 100 miles from home to perform Reserve duties, you can deduct the unreimbursed travel expenses on your tax return. Be sure to keep your receipts and track of every penny you spend from the moment you leave until you return.

Penalty-free withdrawals from retirement accounts

Normally, when you tap into your retirement plan before age 59 ½, you’ll pay taxes on the distribution plus an additional 10% tax. However, qualified reservists may be able to take early withdrawals from their 401k and IRA without penalty.  

To qualify for the exception, you must meet the following requirements:

• You were called to active duty after September 11, 2001 for 180+ days.
• You must take the distribution while on active duty.

Service members who withdraw funds from their qualified retirement accounts must wait at least six months to make new contributions.  

More time to file your tax return

Some members of the military receive an extended deadline for filing and paying their taxes. If you are stationed outside of the U.S. or Puerto Rico, you’re entitled to an automatic two-month extension without filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. If you’re serving in a combat zone, you won’t have to file or pay any owed taxes until at least 180 days after leaving the combat zone.

The death gratuity paid to survivors is not taxable

Losing a loved one can be devastating, both emotionally and financially. To help deal with the financial hardship, the Department of Defense provides a death gratuity to the next of kin of service members who die while on active duty. The one-time lump sum payment of $100,000 is tax-free.

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The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.