Note: Due to the COVID-19 virus, deadlines to file and pay federal income taxes is now July 15, 2020.
Visit the IRS website here for up-to-date information.
By this time, you should have received your W-2 tax forms, documenting taxable income, Social Security, and Medicare contributions.
If your stated income surprises you, you’ll want to know about several tax rules just for military members. For example, not all pay is taxable, and you may have longer to file depending on where you are stationed. If you are deployed to a combat zone, you have an automatic filing extension until 180 days after you return. If your assignment to an overseas location is permanent, you automatically have an additional 60 days to file.
Several resources are available to help address your tax questions. The good news: You can ask for help at your local installation’s finance office through the Volunteer Income Tax Assistance (VITA) program, by using military-specific tax software, or consulting with a qualified Certified Public Account (CPA). Tax information is also available at the Office of the Secretary of Defense’s military compensation website.
“Retirees, especially, could reap significant tax savings by using an experienced CPA,” said Steve Galing, a Relationship Manager with AAFMAA Wealth Management and Trust (AWM&T).
Have questions? Here are some basics to know for the 2019 tax year.
Taxable Income
For active duty servicemembers, the IRS categorizes your “Basic Pay” as part of your taxable income. Additionally, there are over 60 taxable Special and Incentive Pays in several categories; some of these pays could be included in your gross income:
● Hazardous Duty
● Arduous Duty
● Assignment
● Career Incentive
● Accession
● Proficiency
● Retention
● Responsibility
● Medical
● Transfer Between Services
● Rehabilitation
● Skill Conversion
Excluded Income
Non-taxable military pay includes:
● Housing allowance
● Subsistence allowance
● Family separation
● Clothing
● Dislocation
● Family subsistence supplemental
Entitlements earned in a Combat Zone Tax Exclusion Area (CZTE) or Qualified Hazardous Duty Area (QHDA) for enlisted personnel and warrant officers are non-taxable. Beginning 2019, commissioned officers will pay taxes on amounts earned over the base pay of the service's senior E-9 ($8,578.50), plus Hazardous Duty Pay ($225).
“Combat pay” is an unofficial term referring to the entitlements a military member receives while serving in a CZTE or QHDA location (see the IRS's list of current combat zones).
Earned Income Tax Credit
Some servicemembers can qualify for the Earned Income Tax Credit (EITC), which allows those with lower incomes to receive a refund on the taxes they've paid.
For 2019, the IRS has set these maximum table limits for EITC:
● $6,431 with three or more qualifying children
● $5,716 with two qualifying children
● $3,461 with one qualifying child
● $519 with no qualifying children
“Some servicemembers may assume they earn too much to qualify for EITC, but when you exclude combat pay they may indeed qualify,” said Robert (Rob) S. Rea, Relationship Manager with AWM&T.
Other Exceptions
Military members have more flexibility than civilians do in avoiding capital gains taxes when they sell their homes. “If you're on extended duty more than 50 miles from home for longer than three months, you might be able to avoid taxes on your home sale if you lived in it for at least two of the past 10 years,” said Kevin Holton, AAFMAA Mortgage Services LLC (AMS) Vice President of Branch Sales.
The child tax credit, which typically only applies if the child lives with the taxpayer for at least half of the tax year, also differs for military members. “Separation due to military service is set aside in determining the time of residency for purposes of claiming the credit,” explained Galing.
When a soldier dies in combat or from injuries acquired in combat or during a terrorist event, all taxes due for the year of death are forgiven, and taxes paid during that year are refunded.
Additionally, under the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), when an Active Duty servicemember dies, their surviving spouse can contribute up to $500,000 into a Roth IRA. “Congress recognized the selfless service for our military members and their families, and established an opportunity for our families to create long-term wealth,” added Galing.
What About Retirees?
Like civilians, for 2019, servicemembers can contribute up to $6,000 to an IRA, plus those 50 and over can add an extra $1,000 in catch-up contributions.
Additionally, retired servicemembers 72 and older who have an IRA can make a Qualified Charitable Distribution (or QCD). “This lets them donate funds from their IRA directly to a charity, without withdrawing those funds first and paying taxes on them,” Galing said. Also, a benefit from the CARES Act is that IRA owners do not need to take Required Minimum Distributions (RMDs) from their accounts in 2020.
We’re Here to Help
At AAFMAA Wealth Management & Trust, our vision is to be the Premier provider of insurance, financial and survivor services to the American Armed Forces community by providing financial planning, investment management, and trust services.
The CARES Act created a number of changes and benefits to help servicemembers and families get through the COVID-19 Virus situation in 2020. If you have any questions about the CARES Act or your personal financial situation, please reach out to us. Call 910-390-1933.
*Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice. Nothing contained in this communication should be interpreted as such. We encourage you to seek guidance from your tax or legal advisor. Past performance does not guarantee future results.