Disclaimer: All the information in this article is for general knowledge and does not constitute legal advice. Seek professional guidance from credentialed tax preparers if you have questions when preparing your tax returns
It is that time of the year again; tax season is upon us. People are getting their W-2s from their employers. 1099-INT, 1099-DIV, 1099-NEC, 1099-MISC, and many other forms that are part of the IRS world. This year the Internal Revenue Service will begin accepting and processing returns starting on Friday, Feb. 12.
To speed refunds during the pandemic, the IRS urges taxpayers to file electronically with direct deposit as soon as they have all the information they need. Soon after tax refunds will begin arriving for those early bird filers.
When It Comes to the Military, the Tax Code Has Many Options
When it comes to the military, the tax code has many options and unique ways to assist enlisted and officers and their families either during permanent changes of station (PCS) or while serving in a combat zone.
The IRS has published a lengthy and very detailed document explaining the differences between a tax return prepared by civilians and those by active duty personnel. Publication 3 (2019), Armed Forces’ Tax Guide is a great resource if you are not afraid of legal documents. But let’s face it, most of us probably have better things to do than to read dozens of pages of a legal tax manual.
The federal tax filing deadline is April 15. However, if you are assigned a tour of duty outside the United States and Puerto Rico for the entire due date of the tax return, you are eligible for a four months’ extension by filling out Form 4868. However, you will need to pay interest on any taxes not paid by the April 15 filing deadline.
The income amount that appears on a military pay slip is derived from several categories with different tax implications. Some of the pay on your W-2 will be income that is part of your gross income. This will include basic pay, bonus pay, incentive pay, special pay, some in-kind benefits, and all the sub categories that fall under these headings. Another part of the pay on the W-2 form can be excluded from your gross income, for example, combat pay, many different allowances, and in-kind military benefits.
If You Serve in a Combat Zone, You Can Exclude That Pay from Your Gross Income
What is combat zone pay? If you serve in an area that the President has declared a combat zone, you can exclude that pay from your gross income. To date combat zones include Afghanistan, Kosovo, the Arabian Peninsula and, by an act of Congress, the Sinai Peninsula. Troops who have served in support positions outside a combat zone and were eligible for special duty pay for being subject to hostile fire or imminent danger can also exclude this amount from their gross pay.
Currently this category includes: Jordan, Kyrgyzstan, Pakistan, Tajikistan, Uzbekistan, the Philippines, Djibouti, Yemen, Somalia, Syria, Federal Republic of Yugoslavia (Serbia/Montenegro), Albania, Kosovo, The Adriatic Sea and The Ionian Sea—north of the 39th parallel, The Persian Gulf, The Red Sea, The Gulf of Oman, the he Arabian Sea north of 10 degrees north latitude and west of 68 degrees east longitude, the Gulf of Aden, The total land areas of Iraq, Kuwait, Saudi Arabia, Oman, Bahrain, Qatar, and the United Arab Emirates, Jordan, Lebanon, also Turkey east of 33.51 degrees east longitude.
Let’s start with the good news. if you are an enlisted member of the military, warrant officer, or commissioned warrant officer you can exclude all your combat pay. But if you are a commissioned officer, your exclusion is limited to the highest rate of enlisted pay (plus any imminent danger/hostile fire pay you’ve received) for any part of each month during which you served in a combat zone or were hospitalized as a result of your service there. Remember, this calculation will usually be taken care of by your finance office. But if the amount on your W-2 does not include the combat pay in box 1, contact your finance office so a corrected W-2 can be issued.
Do Not Confuse Combat Pay with the Foreign Earned Income Exclusion
In general, Americans who earn money abroad must pay taxes on it. This is a complex field of law and requires professional guidance. If you have a family member who worked in the U.S. while you were stationed abroad, or if you worked abroad outside the scope of your military assignment, you should also be aware of this tax issue. You might be able to exclude income earned abroad. For 2019, the exclusion was $105,900.
Preparing tax returns can be daunting, so take your time and don’t wait until the last minute. There are many great options as far as the software you can buy that will make tax preparation a fairly easy experience. Also, remember that 70% of Americans are eligible for free e-file services for their federal tax return on the IRS website. If your adjusted gross income (AGI) was $72,000 or less, you can use several options offered by the IRS in partnership with commercial companies that offer tax preparation software. Some of these computer programs have the ability to deal with military pay. The information is easily available on the IRS website.