Special tax provisions for members of military
Katie Hanson is a military spouse; her husband, Lt. Cmdr. Marc Hanson, is on active duty in the Navy.
He has Florida as his home of record, even though he is based at Naval Air Station North Island, Coronado, in California. The Hansons never lived in Florida as a married couple. She now lives and works in California, and they own a home in South Carolina that they rent.
So where do they pay taxes?
She has to file a California return and they both have to file in South Carolina. If Florida had a state income tax, he'd have to file there. That's on top of their federal return.
For military personnel, "it's not unusual to have to file taxes in multiple states," said Katie Hanson, project manager for TurboTax's military edition.
That's just one of several tax complexities that military families must deal with when figuring out their taxes.
"Quite often the service members are aware of the benefits but their families are less aware," said Mark Luscombe, principal analyst at CCH, a tax preparation service. "Sometimes problems come up when a service member dies." He said survivors don't always understand the military tax issues.
First off is the question of where the home of record is.
Home of record is where you enter the military, Hanson said. Or it can be the place where you live while in the service that you consider your home. It's where the military will move you back to when you leave the service. Your home of record will determine where you file state income taxes.
There's also the question of what income is taxable.
"The basic pay in the military is taxable but a lot of the secondary stuff is excludable," Luscombe said.
Pay while serving in an officially declared combat zone, for example, is not taxable as income.
"When I was in the Navy in Vietnam, the rule then and still is that you have to have been in the combat zone for at least one day a month to get the exclusion for that month," Luscombe said.
Today, combat zones include Afghanistan, the Persian Gulf region, including Iraq, and the Balkans.
"Service in a combat zone includes any periods you are absent from duty because of sickness, wounds or leaves," says the Internal Revenue Service.
Those who were injured or exposed to diseases in combat zones can, for tax purposes, exclude from income their pay during the time they were hospitalized, even if the hospitalization occurs outside the combat zone. Usual tests pertaining to time and distance for moves do not apply for members of the military.
Service members deployed to combat zones can get an automatic extension for filing their federal tax returns, to 180 days after they return to the United States.
Members of the military also may request to defer payment of income taxes due during their time of service for up to 180 days after that service ends.
They also may include their nontaxable combat pay in their earned income if that would mean a higher earned income tax credit. The amount of the credit, which benefits low- and moderate-income taxpayers, is determined by income and the number of dependents. It is refundable, meaning you will receive it even if you don't owe taxes.
The government will reimburse the moving costs incurred by military personnel relocated to different bases. Anything over and above what the government pays for can be deducted provided it meets the distance requirements. For example, the military will not pay the full cost of shipping a car, Hanson said.
Active-duty military personnel also have more leeway in qualifying for the capital gains exclusion on the sale of their home. Usually to qualify for the exclusion — up to $250,000 for an individual and $500,000 for a married couple filing jointly — you have to own and live in the house at least two of the previous five years. For members of the military, the five-year period can be suspended if they are on active duty.
As for uniforms, Hanson said it's a myth that members of the military can deduct their cost. "If you can wear khakis or uniforms off base, you don't even qualify," she said.
But things like battle dress uniforms that cannot be worn when off duty, and insignia of rank or epaulets can be deductible. Still, the cost has to meet the threshold of 2 percent of your income.
The IRS will grant tax forgiveness to members of the military who die "while in active service in a combat zone, from wounds, disease or other injury received in a combat zone or from wounds or injury incurred in a terrorist or military operation."
Because of the complexities of military tax returns, TurboTax has created a special edition of its tax software for servicemen and women and their families. The product was created by former members of the military and military spouses.
The IRS has also has a special publication, Publication 3, for members of the armed forces.