As a former military family (my husband is a retired Marine), I have many military clients around the world. There are a surprising number of tax rules specifically for members of the armed services. If you are active duty or former military, thank you for your service and read on!
Combat Pay and EIC: The Earned Income Credit is a payment available to lower-income, working taxpayers. The amount of the credit varies based on age, income, and number of children. Military members receive tax-free income while serving in a combat zone. Special Military Rule: Combat pay can either be included or excluded for EIC purposes to maximize the credit amount.
State of Domicile: You may be required to file a return in your home state or state of domicile even if you are stationed in California. Military wages are considered earned in the state of domicile, not the duty station. Your spouse may or may not share your state of domicile. If your spouse works or you have an additional job in California, you will be required to file a California state return for that income.
Rental Properties in other states: A typical scenario: You are stationed in North Carolina and buy a home. Three years later, you get orders to Camp Pendleton. You decide to rent out the house instead of selling it. This requires you to report the income and expenses for the property, but there are some tax advantages (such as depreciation and travel to manage the property) which may result in a deductible loss each year. You will be required to file a state return in North Carolina along with possibly one in your state of domicile plus California in some cases.
Capital Gains: Continuing the scenario above: After four years in base housing at Camp Pendleton, you get orders to Okinawa. You decide to sell the North Carolina house. The sale of a personal residence is exempt from tax only if you lived in it at least two of the previous five years – that ship has sailed. But there is good news! For military members who left the home due to orders, the period is extended to 10 years – you can still sell the house without paying capital gains tax.
Uniform Costs: Uniform costs are deductible if you itemize deductions and when they exceed 2% of your income. This includes the cost of uniforms you are “prohibited from wearing when off duty” - plus dry cleaning and tailoring. You must reduce the total by the amount of your clothing allowance. Contrary to what you may have heard, haircuts are not part of your uniform costs, this was clarified in an IRS ruling.
VITA: Volunteer Income Tax Assistance is available on base for free. For those with simple returns, this is a great option, and I recommend taking advantage of the service. If you have more complicated matters with which VITA cannot help, such as businesses or investments, it may be beneficial to use a tax professional.
Karyn Vaughn is an Enrolled Agent and business consultant. She has been helping taxpayers for 30 years. She has extensive experience in tax matters for individuals, corporations, partnerships, and IRS settlements. She specializes in military taxpayers. Her status as an E.A. allows her to practice in all 50 states and to represent taxpayers before the IRS.
No comments:
Post a Comment