Plenty of servicemember tax breaks — if you know where to find them
Members of Congress probably didn’t really twist themselves into pretzels devising ways to give tax breaks to active-duty servicemembers. It just looks that way, thumbing through the Internal Revenue Service’s Armed Forces’ Tax Guide.
But to enjoy a few of those perks, you have to know the right way to ask.
A good way to begin learning, base officials said, is to visit base tax preparation offices. These offices are staffed by volunteers the IRS has trained specifically to help troops and their families get all the tax breaks they legally can claim.
Those who’d like to know more — or to make sure they’re taking advantage of any tax breaks that might apply to them — may wish to consult the 34-page IRS tax guide, available free online. It’s the mother lode of specific information on how federal tax law applies to those in uniform and their families.
Topics range from what moving expenses can be deducted to when an award for a bright idea may be tax-free. But the IRS Armed Forces’ Tax Guide and tax advisers indicate a few provisions may be of special interest to servicemembers:
Combat zone exclusion: Active-duty pay earned in a combat zone is not taxable. In addition to presidentially declared combat zones, the IRS considers a combat zone to be any place in which you get special military pay for duty subject to hostile fire or imminent danger. The guide lists several other conditions in which pay is considered combat pay. And it states you won’t even have to claim this tax break: Combat pay isn’t reported to the IRS as income.
Earned Income Tax Credit (EIC): Designed to decrease or eliminate the tax bills of low-income families and individuals who have taxable income that was earned — as opposed, say, to income from investments or welfare payments.
To claim the credit, individuals or couples must have more than one qualifying child and have earned less than $34,458 in 2004 ($35,458 if married and filing jointly); have one qualifying child and have earned less than $30,338 ($31,338 if married and filing jointly); or have no children and have earned less than $11,490 ($12,490 if married and filing jointly).
You can take this simple test to see if you qualify for EIC.
The EIC can leave some individuals not only owing no income tax but also on the receiving end of a federal payment. But in past years, some servicemembers found they didn’t qualify because all their pay was earned in a combat zone — and therefore wasn’t reported to the IRS as taxable income.
New this year: Now, even though combat pay still won’t count as income when figuring your tax bill, you may choose to have the IRS consider all or part of your combat pay as earned income just so you can qualify for the EIC.
Elaine Reeves, tax coordinator at Torii Station on Okinawa, says the new rule eliminates situations in which servicemembers otherwise eligible for the EIC became ineligible because they received nontaxable combat pay.
However, she cautioned, depending on a servicemember’s income and other factors, sometimes electing to consider combat pay as earned income actually may increase a servicemember’s total tax bill.
“The bottom line,” Reeves said, “is calculate the EIC with and without the nontaxable combat pay and file with whichever gives you the larger credit.”
On-base tax service centers will perform these calculations so servicemembers can determine which method will result in more cash for them.
Child tax credit: For 2004, this credit reduces your actual taxes owed by $1,000 per qualifying child; it’s not just a deduction from your taxable income.
“The child tax credit is not the same as the credit for child and dependent care expenses,” the IRS Armed Forces’ Tax Guide states. But as with the EIC, for purposes of computing the Child Tax Credit, combat pay now may be counted as income without changing its exclusion from your taxable income.
Families earning from $27,000 to $110,000 are eligible for the Child Tax Credit. If your modified adjusted gross income is over the income threshold, you still might be able to receive a smaller credit.
To claim the Child Tax Credit, you must file on form 1040 or 1040A; you can’t claim it using Form 1040EZ.
Extended filing deadlines: The regular filing deadline is April 15. But, the IRS servicemembers’ tax guide states, “You can receive an automatic four-month extension … if you file Form 4868 by the regular due date” — and if you don’t owe any taxes. If you do owe, you’ll be billed not only for the amount owed but for interest until you pay your tax bill.
And if you’re a servicemember on an assigned tour of duty outside the United States through the date your return is due, you can skip filing Form 4868 and still get a two-month extension, the tax guide states.
Also — and perhaps of particular interest to reservists and National Guard members — the armed forces tax guide says “if you are a member of the Armed Forces, you may qualify to defer (delay) payment of income tax that becomes due before or during your military service” — if you tell the IRS your ability to pay “has been materially affected by your military service.”
Any Social Security and Medicare taxes you may owe are not included in the deferral.
As with other tax breaks and military tax exceptions, the Armed Forces’ Tax Guide lists more specifics and provides Internet links to additional information about filing deadlines. As with other tax code provisions that may affect members of the U.S. military, base officials say, the IRS has prepared offices to help servicemembers and their families.
What you'll need
Most servicemembers filing their tax returns electronically at base tax centers, and opting for direct deposit of their refunds to their bank accounts, receive their refunds in as little as a week.
Here’s what Elaine Reeves, tax coordinator for the Army’s 10th Area Support Group at Torii Station, Okinawa, tells people to bring with them when they come to one of the Volunteer Income Tax Assistance offices on military bases throughout the Pacific:
Photo identification cards.Power of attorney. “You’ll need this if you’re filing a joint return and your spouse is absent,” Reeves said. IRS instructions state that to file taxes electronically, married couples filing joint tax returns both must be present to sign the required forms, unless the person filing has a power of attorney for the absent spouse.Social Security cards and birth dates for yourself, your spouse and dependents.All W-2 forms for 2004. Hard copies of the forms should have been sent out by the end of January. Copies also are available at the My Pay Web site.If applicable, all 2004 Form 1099s — 1099INT for interest income on bank accounts or bonds; 1099DIV for dividend income on stocks, funds and IRAs; 1099MISC for all self-employment income; 1099R for retirement income.Form 1098 for mortgage interest and payment of property taxes.Bank routing numbers and account numbers (a voided check might do) if you are electing to have any refund deposited directly to a bank account.The name, address, receipts and day-care identification numbers (such as Social Security numbers) of day-care providers.Receipts for deductible expenses, such as rental property, moving, education.Tuition receipts.Educator expense documentation for teachers who worked more than 900 hours in 2004.A copy of your 2003 tax return.Capt. Curtis Allen at the Marine VITA office on Camp Foster, Okinawa, added that anyone who claims a child in accordance with a divorce decree must bring in a copy of the decree.
Persons who owe taxes have several payment options, according to the IRS. Payment can be made by April 15 by authorizing electronic funds withdrawal — a direct debit — from a bank account; by credit card; or by check or money order made out to the United States Treasury by using a form 1040-V payment voucher.
—Stars and Stripes