Military veterans should be and are some of the most respected individuals within our community but more often than not, they fall short when it comes to finance as they don’t get the right advice from financial experts. This - coupled with the fact that they get little support from the government - makes it all the more important for vets to stay informed when it comes to tax rules for military income.
There are some things you need to keep in mind as a veteran or active military member which will help you get more in touch with military taxes. There are special tax rules for military income, and this article will help you figure and sort them out.
MILITARY TAX BREAKS
There are special military tax exempts which are not available to civilians: Uncle Sam recognizes that there are hardships and sacrifices - both personal and financial - which the military service demands. One of these is freedom from taxes if you serve in a combat zone as an enlisted service member or as a warrant officer for any part of a month. Your income for that particular month will be excluded from federal taxes.
In conjunction with the IRS and the Volunteer Income Tax Assistance Program, the U.S. Armed Forces provide free military tax relief in the form of free income tax return preparation assistance for active duty military personnel and their families.
Moving every few years might be associated with active military and it definitely gets expensive for active-duty members. However, if your move is a required permanent change of station, the IRS lets you deduct it as reasonable unreimbursed expenses of relocating yourself and your family.
YOU CAN INCREASE YOUR SAVINGS
Another military tax benefit is that you can save some extra money and reduce your debts. IRS rules actually allow tax-free combat pay to be used for contributions to your Individual Retirement Account and since your IRA can grow tax-deferred until the time you withdraw the money, contributing more money to it can provide a serious saving boost for you over the years.
SELLING YOUR PROPERTY
If you sell your home, you may not have to pay taxes on all the profits you’ve acquired from the sale. A “main home” is legally defined as the house you have lived in as a primary residence for more than two years. As long as it meets the certain ownership test criteria the IRS outlined, you may also be able to exclude gain from the sale of a house that was used as a business or rental property.
KEEP ALL YOUR RECORDS IN A SAFE PLACE
With regards to veteran tax, you need to be able to show proof of your status as a US veteran in order to qualify for veterans' tax benefits. Be sure to keep all important documents in one place and at hand and make copies to be extra safe! In the event that you misplace any of your relevant records, contact the U.S. Department of Veterans' Affairs for an immediate replacement.
TAKING OUT HOME LOANS AS A VETERAN
As a veteran looking to take out a loan backed by the Department of Veterans' Affairs, you have to be able to prove that you qualify for the VA loan program. You'll need to get your hands on a Certificate of Eligibility from the VA. Your mortgage lender will then submit it along with their paperwork for the VA Loan Guarantee. Some lenders will be able to obtain the COE for you. If not, request a certificate using VA Form 26-1880 with proof of your eligibility attached to it.
Disability compensation is money paid to vets disabled by an injury or a disease acquired during active military service. The amount of compensation varies with the degree of disability and the received benefits are not subject to federal or state income tax.
- Disabled veterans may be eligible to claim a federal tax refund in two cases:
- If there’s an increase in the veteran’s disability percentage as deemed by the VA
- The combat-disabled veteran applying for and being granted, Combat-Related Special Compensation, after an award for Concurrent Retirement and Disability.
STANDARD HOMESTEAD EXEMPTION FOR VETERANS WITH DISABILITIES (SHEVD)
PTAX-342 or the APPLICATION FOR DISABLED VETERANS’ STANDARD HOMESTEAD EXEMPTION provides an annual reduction of the equalized assessed value (EAV) of a residence lived in by a veteran who has a disability, or a spouse with a disability. The SHEVD amount is based on the percentage of disability of the veteran as determined by the U.S. Department of Veterans’ Affairs.
Many states now eliminate veterans’ property tax liability altogether. A good example of that is California’s Disabled Veterans’ Exemption, which can be used as long as the property is the veteran’s primary place of residence.
MILITARY TAX BREAKS WHEN TRANSITIONING BACK TO LIFE AS A CIVILIAN
When transitioning back to civilian life, you may be able to deduct some of the expenses you’re met with when you are looking for a new job. Expenses that qualify for deduction may include travel costs, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your relocation is very closely related to the start of work at a new job site and if you meet specific requirements. These deductions may also be paired with disability benefits.
THE GI BILL
Another thing to keep in mind with military tax is the GI Bill. Under the Post-9/11 GI Bill, the U.S. Department of Veterans Affairs (VA) will pay tuition equal to the most expensive public college tuition in the state and under some circumstances, the government may pay even more. The bill also provides up to $1,000 for school books and supplies, and a housing allowance the VA pays directly to you. If you're taking classes entirely online, however, you don't get a housing allowance. Some individuals may also qualify for a one-time relocation allowance. None of this is taxable income, so you don't need to mention it on your Form 1040.
Retirement Pay Service members who have been on active duty or served in the Reserves or Guard for an extended period of time, usually at least 20 years, may receive pay upon retirement. The type and amount of retirement pay depend on your age and length of service.
Usually, retirement pay is reported as taxable income. However, the amount a Retiree pays to participate in the Survivors Benefit Plan, Military Disability Retirement Pay and Veterans’ benefits are all considered tax-free income.