Military Tax Tips: Deductions and Credits

Many types of military pay allowances are not subject to federal income tax. Some of the most common tax-exempt military allowance types include:

• Basic Allowance for Housing (BAH)
• Basic Allowance for Subsistence (BAS)
• Family Separation Allowance (FSA)
• Imminent Danger Pay (IDP) and Hostile Fire Pay (HFP)

While military retirement pay is not exempt from federal taxes, most states have employed partial tax deductions or full exemptions on military retirement income.

Military Tax Deductions

Failing to claim all available tax deductions can shortchange you on your refund or even leave you owing money. The following rundown includes some military write-offs as well as civilian tax credits that you may be eligible for.

Combat Zone Tax Exclusions

If you served in a combat zone (Afghanistan and Kosovo still count) for any part of a month, that month's income is exempt from federal taxes.

Uniform Tax

A very military-specific tax deduction is uniform and maintenance fees. If your base restricts wearing uniforms while off duty and the price of your uniform’s upkeep exceeds your uniform allowance, you can deduct the excess costs. This is usually not the case for active-duty soldiers.

National Guard and Military Reserve Travel Expenses

National Guard and military reserve members can deduct travel expenses from taxes. Traveling more than 100 miles garners a 50-cent deduction per mile, and required overnight lodging expenses are also deductible.

Travel deductions can be claimed on IRS Form 2106 or Form 2106-EZ.

Mortgage Interest

New homeowners may be surprised to learn about all the available tax deductions available to them. One of the biggest tax-deductible items for new homeowners is the deduction on mortgage interest.

To be eligible for this deduction, your mortgage must be for your primary residence or a second home. For individuals, the total mortgage debt cannot exceed $375,000. For joint-filing couples, the total mortgage debt must be under $750,000.

Moving Expenses

Moving expenses are tax deductible. The strict rules about distance and employment for civilians are relaxed for military individuals and families moving for a PCS.

Qualifying expenses include gas mileage, moving trailer rental, packing expenses, in-transit storage rentals, and moving insurance.

Unreimbursed moving expenses can be claimed on IRS Form 3093. A separate Form 3093 should be used for each qualifying move.

Home Sale Exclusion

The home sale exclusion, also known as the “capital gains tax exclusion,” is a special tax treatment provided for the gains on the sale of a primary residence. In addition, there is a military extension of the home sale exclusion that allows service members who are away from their homes on PCS orders to claim this exemption.

Here are some key things to know about the home sale exclusion:

• To qualify, you must have lived in the home for at least two of the past five years (or 24 out of 60 months). These two years don't have to be one after the other.
• Service members who are away from home on PCS orders can still qualify as long as they have occupied the property for 2 of the last 15 years.
• If you're single, you can exclude up to $250,000 in gains. If you're married and file your taxes jointly, the exclusion is up to $500,000.
• You can use this exclusion more than once as long as you meet the rules each time.
• When you sell your home, you usually report it on your tax return. But if your profit is below the exclusion limits, you may not have to pay capital gains tax on that money.

Student Loan Interest

Interest paid on student loans is tax deductible. Your loan provider will send out a 1098-E form around the end of January or February, from which you can get claim amounts.

Earned Income Tax Credit

Another tax benefit military members may be interested in is an Earned Income Tax Credit or EITC. An EITC is a tax credit designed to lessen the tax burden for individuals and families with lower incomes.

Military members may be especially interested in the EITC because combat pay is not included in a service member’s income, making it easier to meet the income requirements.

EITC amounts depend on your filing status and number of children. Qualified individuals and families can receive anywhere from $600 to $7,430 per tax year.

How to Claim Earned Income Tax Credit

To qualify for EITC, the taxpayer must be between 25 and 65 years old, have an earned income under $59,187, and make less than $10,300 in investment income.

If you plan on filing for the EITC, be sure that you and your spouse aren't filing separately. Sometimes, “Married, Filing Separately” or MFS can save a couple of money when they have similar incomes, but in many cases, the amount you will save won’t be more than filing for the earned income tax credit.