Military Tax Deductions Available to Active Members of the US Military

Life as an active member of the United States Armed Forces can be as challenging as it is rewarding. Especially when it comes time to file a US income tax return. That can become for those who qualify – a US expat tax return. It is not uncommon for Military Personnel to be transferred to multiple bases both in the United States and abroad during a 4 year term; and the longer soldiers stay active in the US Military, continue to develop skills in their trade, and move up in rank, the possibility of frequently being transferred or assigned work that requires relocation grows.

This common practice of temporary overseas assignments may lead to confusion about the various deductions, exclusions, and credits available to US Expats living and working in foreign territories and the difference between ‘living in a foreign country’ and ‘completing a temporary overseas assignment.’ As a result, many tax returns are being rejected by the IRS.

While certain exclusions are available to qualifying Military Members for having served in one or more Combat Zones, US Expat deductions like the FEIE (Foreign Earned Income Exclusion) is only available to Armed Forces Personnel (active duty military personnel, including paramilitary forces if the training, organization, equipment, and control suggest they may be used to support or replace regular military forces). Like other American Expats they should meet the minimum qualifications of having earned foreign income and having established a ‘tax home’ in a foreign country (330 consecutive days out of a calendar year).

It’s important to remember that – even though Military Members may be working in countries outside of the United States – they are still being paid US-sourced income and are, therefore, ineligible to claim the FEIE. Additionally, since there is no foreign tax liability on US-sourced income there is no allowance for Military Members to claim the FTC (Foreign Tax Credit). If you are a member of the Military who has lived in a foreign country for a year or longer and you are earning income that is paid to you by a foreign entity and not by the US Armed Forces, you qualify to exclude only that income from your US tax return or claim the FTC against foreign taxes assessed (only one or the other if your excludable, non-US-sourced income doesn’t exceed the maximum FEIE allowance currently set at $97,600 for the 2013 tax year).

Non-Combat Zone Deductions Available to US Military Members and Spouses

Spouses of active Military Members who relocate with their Military Spouse are eligible to claim the FEIE if sufficient time is spent in the foreign territory. If the minimum timeline for establishing a foreign tax domicile is not reached, he/she will still qualify to claim the FTC and gain a credit in the USD equivalent of the foreign taxes that were assessed on income received while living abroad against their US tax liability.

It’s also important to note that Military Members who incur relocation expenses which are not reimbursed by the Armed Forces are able to deduct these expenses on their US income tax return. Qualifying expenses include items such as storage, termination of lease fees, airfare, moving expenses (truck rental, movers, etc), temporary lodging, and other expenses which were only incurred as a result of being transferred. In order to protect oneself against an unfavorable IRS audit in the future, it’s vital that a complete set of records with expenses incurred and housing allowances or reimbursements for such expenses received from the Armed Forces.

Other special tax benefits include:

Deadline Extensions

Most tax deadlines can be postponed for members of the military, such as those serving overseas. Automatic extensions of time to file and pay taxes are available to those who qualify.

Earned Income Tax Credit

Military members who receive nontaxable battle pay can choose to include it in their taxable income under special rules. One reason they might do so is to boost their earned income tax credit amount. If you qualify for this benefit, you may owe less tax or possibly receive a larger refund. If a taxpayer's 2019 earned income exceeds their 2021 earned income, they can utilize their 2019 earned income to calculate their 2021 earned income credit.

Joint Return Signatures

In most cases, both spouses must sign a joint income tax return. If military service hinders this, one spouse may be able to sign on behalf of the other or obtain a power of attorney. If you're unsure whether a power of attorney is correct for you, go to the legal department at your installation.

Reserve and National Guard Travel

On their return, members of an Armed Forces reserve component may be allowed to deduct their unreimbursed travel expenditures. They must travel upwards of 100 miles away from home in order to do so as part of their reserve duties.

ROTC Allowances

Some of the money awarded to advanced ROTC students isn't taxable. Active-duty ROTC pay, on the other hand, is taxed. This includes expenses such as summer advanced camp fees.

Combat Zone Pay

There is an ever-evolving list of countries that are officially regarded by the Commander in Chief as Combat Zones. Active US Military Members are encouraged to check this list of designated Combat Zones each and every time they are assigned work in a new foreign territory, because income earned while serving in a Combat Zone is completely exempt from US taxation. If you are earning other income besides your regular Armed Forces wages, you should refer to IRS Publication 3 or speak to an international tax consultant before filing your US income tax return as there are only specific types of other income that are deductible because of having served in a Combat Zone.

There are a couple rules to Combat Zone income that enable Military Members to deduct a larger portion of their income than some realize. One of these rules is: One day of work in a Combat Zone qualifies the entire month’s worth of Military income to be deducted as Combat Zone pay. In other words: If – for whatever reason – you were deployed to a Combat Zone in March and completed your assigned task within 24 hours, you would be eligible to exclude all of your Armed Forces wages for the month of March from your US income tax return.

Another rule is: Being stationed in close proximity to a Combat Zone but technically not within the boundaries of said zone doesn’t always qualify you for Combat Zone pay; but if you are performing duties that provide a direct benefit to the Military base or other established Armed Forces operations located within the Combat Zone, you are regarded as officially working in the designated zone and the pay you receive that month will be excludable as Combat Zone wages.

Tax Return Filing Procedures for Combat Zone Wages

In regard to most IRS activity of active Military Members serving in a Combat Zone, there will be a suspension of activity assigned to your account. This means that you will not be expected to file a US income tax return until 180 days after the date you are no longer serving in a Combat Zone. It also means that if there were any plans being made by the IRS to schedule you for an audit or take any other compliance enforcement measures against you that these plans would be on hold during your time served in the designated Combat Zone.

There is an exception to this suspension of activity, and it pertains to accounts for which a balance due had already been assessed by the IRS before the time of your deployment. In this situation, applicable fees and interest will keep accruing; so it may be a good idea to set up a payment plan – either on automation or with somebody you trust – before your deployment.

In order to receive the aforementioned suspension of IRS activity, you must notify the IRS of your Combat Zone assignment. This can be accomplished by sending an email to combatzone@irs.gov along with your name, your US tax home address, your date of birth, and your Combat Zone deployment date. Due to the increased risk of identity theft on the internet, you are encouraged to NEVER SHARE YOUR SOCIAL SECURITY NUMBER – even when corresponding with the IRS. If you provide the 4 pieces of information previously mentioned in this paragraph, it will be sufficient information for the IRS to take appropriate action. If there is any reason why the information you provide causes any confusion with the IRS representative, clarification will be sought.

After you are finished serving in the Combat Zone and you are ready to file your US income tax return, you will use the same Form 1040 as you would any other year, but you should write “COMBAT ZONE” at the top of your return large and clear enough to not be missed.