At KKOS Lawyers and Kohler & Eyre CPA’s, we salute our brave men and women in uniform. THANK YOU for putting your life on the line to protect our great country. We honor and cherish your sacrifices that keep us safe.
In turn, we try to give back where we can, personally, to you amazing service members. As such we have summarized some important tax strategies for active duty military personnel. We work diligently to help our active-duty military clients as well as military veterans strategize and make the most of tax planning opportunities.
Here are 5 tax strategy/opportunities to be aware of and discuss with your tax advisor each year.
Strategy #1: Know what benefits/compensation are taxable and which ones are not!
Like all U.S. citizens, members of the Armed Forces receive income that is taxable to them. This includes foreign source income (income earned overseas). Some foreign income may be excluded, but these exclusions aren’t available for wages and salaries of military and civilian employees of the U.S. Government. The following list provides payments are typically included as taxable benefits and compensation for members of the Armed Forces:
- Basic pay: This includes compensation for active duty, attendance at a designated services school, drills, reserve training and training duty pay, and CONUS COLA amounts (supplemental cost of living allowances).
- Special pay
- Bonus pay
- Incentive pay
- Other pay: This would include accrued leave, student loan repayment programs, high deployment per diem amounts, personal money allowances for high-ranking officers, and the personal use of government provided vehicles.
- Differential wage payments: Differential wage payments are payments made by an employer (other than the Armed Forces) to an individual. They are paid for a period during which the individual performed services in the uniformed services while on active duty for a period of more than 30 days. These payments represent all or a portion of the wages the individual would have received from the employer if the individual had been performing services for the employer during that period.
- Qualified reservist distributions (QRD): The portion of your QRD reported by your employer as wages on Form W-2, Wage and Tax Statement, is included in your gross income and is taxable. A portion of this amount may also be subject to employment taxes as well.
- Uniformed Services Traditional Thrift Savings Plan (TSP) distributions (except for tax-exempt combat pay contributions)
Depending on the type of income, there are many items that should not be included in the taxable income for members of the Armed Forces. The following list provides payments are typically excluded from your taxable income:
- Combat pay: This is compensation for active service while in a combat zone. Some states may have bonus pay programs that are also typically not taxable.
- Disability payments, including payments received for injuries incurred as a direct result of a terrorist or military action
- Group-term life insurance amounts received by an individual or his/her family
- Professional education or ROTC educational and subsistence allowances
- Uniforms and uniform allowances
- Death allowances such as burial services, death gratuity payments to eligible survivors or travel of dependents to burial site.
- Family allowances including certain educational expenses for dependents, emergency allowances, evacuation to a place of safety or separation allowances.
- Living allowances including a basic allowance for housing (BAH), basic allowance for subsistence (BAS), overseas housing allowances (OHA), or housing and cost-of-living allowances abroad paid the US or a foreign government
- Moving allowances
- Most travel allowances
- In-kind military benefits such as dependent-care assistance programs, legal assistance, medical/dental care, commissary or exchange discounts, and space-available travel on government aircrafts
- Military base realignment and closure benefits paid under the Homeowners Assistance Program (HAP) (unless total payments are greater than certain thresholds)
Strategy #2: Deduct expenses paid with your excluded basic allowance for housing
A common question that military clients may have is whether or not they can claim a deduction for items paid for with their BAH, since the BAH is a living allowance that was not included in taxable income in the first place. Great news here—you can still deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH!
Strategy #3: Be aware of special combat zone and/or contingency operation extensions
If you serve in the Armed Forces in a combat zone, you have qualifying service outside of a combat zone, or if you serve in the Armed Forces on deployment outside the United States away from your permanent duty station while participating in a contingency operation, you may be allowed additional time to file your tax returns and/or pay your taxes. Spouses also may be able to enjoy these benefits.
The extension period may vary, but you could be entitled to at least an extra 180 days after the later of (1) the last day you are in a combat zone, serve outside the combat zone, or serve in a contingency operation or (2) the last day of any continuous qualified hospitalization from injury from service in these areas. Take the later of those dates and add at least 180 days (i.e. almost six months) to do the following items:
- Filing tax returns
- Paying taxes due
- Filing for credit or refund from the IRS
- Making contributions to an IRA account
- Giving or making any notice or demand by the IRS for payment of taxes
Strategy #4: Deduct unreimbursed expenses
Unreimbursed employee expenses are deducted on Schedule A as an itemized deduction. These expenses are deductible to the extent that they are more than 2% of your adjusted gross income, or AGI. Keep good records here and you may find that they can really add up!
Even if you are a reservist, you may be entitled to deductions for many of the activities that you do. For example, if you are a member of a reserve component of the Armed Forces and you travel more than 100 miles away from your home in connection with your work as a reserve member, you can typically deduct your unreimbursed travel expenses from the time you leave home to the time you return home. Record keeping is critical here to substantiate your deduction. Track your meals, lodging, your total miles driven, and keep receipts. For the miles, it helps to maintain a mileage log that includes the date and the purpose of the trip.
Other expenses to consider are unreimbursed expenses to maintain uniforms of which you are prohibited to wear off duty. In other words, the cost and upkeep of uniforms like military battle dress and utility uniforms that are not typically allowed to be worn off duty are deductible. You may also be able to deduct unreimbursed professional dues if they are required for your military service. For example, if you are an electrical engineer at a military base and you pay dues to the American Society of Electrical Engineers without reimbursement, you would be able to claim a deduction for those dues.
Strategy #5: Start your small business ‘on the side’ NOW!
One of the best tax strategies in America, that YOU ARE FIGHTING for, is the opportunity to have a small business. Get started now!! This could be an online business you start on the web during your time down and days off, it could be a service business that you are laying the ground work for on your ‘leave’ when you are home, OR it could be simply investing in a rental property where you have family or have been serving on a base.
A small business will give you an extra source of income, tax deductions related to starting the business (including but not limited to travel, dining, entertainment, computers, supplies, equipment and auto…just to name a few). Most importantly, it can give you some focus and direction for what your plans may be after your tour is up. Why not build your own business, then search and look for J.O.B. when you get back. Plan the future you want!!
Keep your eyes open. No idea is a bad one. If you don’t know where to start, consider my 8 Steps to Start and Grow your Business. It’s an affordable workbook and series of videos to walk you through the steps to build your Business Plan, Marketing Plan and Strategic Plan to get it off the ground.
In, sum, we love our active-duty military men and women as well as those that have served in the past! We thank you for your service, and we are here to help with whatever situation you find yourself in. Whether you are actively serving or making the transition back to civilian life, consider these ideas above to help along your journey.
Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate. Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.