Tax Treatments for Military Taxpayers

I’m an Army Brat. My dad was career Army and served until he had no option but to retire or become an officer. Mom was in the Navy during WWII. One brother was career Navy who became an attorney when he retired. (The military service makes up for the attorney thing.) Another brother served in the Army for a tour and I almost made it to the Air Force. I also live in an area which always sees a high percentage of the young people enlist in the military. And while I’m happy that these kids are coming home, I have been very worried about the chances of finding a job in the current economy.

So, I’m happy that the Senate has addressed the issue with the VOW to Hire Heroes Act. As outlined by Kelly Phillips Erb in her Taxgirl Blog. The legislation would provide tax credits to employers who hire vets that  meet the unemployment requirements. The bill will also beef up the education opportunities available to the vets.

There are, however, other special tax treatments available to the military; active duty, reserve or retired. All treatments have their own qualifications and “buts”. This is intended as an overview.

• Veteran’s Benefits are not taxed. The only time I know they come into play is for the Kansas Homestead/Safe Senior rebate.
• Combat Pay is not taxable although it comes into play in some calculations.
• The First Time Homebuyer Credit allowed active duty personal extra time to qualify for the credit and provided an exemption to the recapture rule for a duty related move.
• A duty move also allows an active duty military taxpayer to qualify for the Sale of Personal Residence exclusion even if they don’t meet either of the time rules.
• For purposes of the Earned Income Credit, the taxpayer can chose to include combat pay into the calculation for a larger credit.
• Combat pay, along with pay differential, is also used to determine if a taxpayer has enough compensation to for an IRA contribution.
• Combat pay also gives the taxpayer longer to file their taxes, claim a refund and defer collections.
• Reservists can deduct the cost of their uniforms, insignias and their mileage, lodging and other training expenses. Active duty military can only deduct the insignias and related stuff. (Of course, they have to meet the miscellaneous deduction floor and other Schedule A qualifications.)
• Many states do not tax military pensions or partially exclude the income. Kansas and Oklahoma are among them.
• A military spouse can get special state tax treatment thanks to MSRRA.

I am sure that there are other special tax treatments for active, reserve or retired military personnel. These were the ones I could think of off the top of my head. And I think the proposed tax credit for employment would be a well deserved addition to these.

My thanks to all who served or are serving in any branch of the military.