Tax time for military personnel, families
Hello military community,
I hope the New Year is finding you all well. As I was gathering my papers together for my appointment with the tax accountant for this year’s taxes I couldn’t help but think of next year too. My husband will be leaving for Afghanistan this spring and everything will change including taxes and what we claim, write-off, special tax breaks for military, etc.
Here are a few to keep in mind this year as you are filing your taxes.
Combat Pay Perks
If you serve in a combat zone as an enlisted service member or as a warrant officer for any part of a month, all your income for that month is exempt from federal taxes. For officers, the monthly exclusion is capped at the highest rate of enlisted pay, plus any hostile fire or imminent danger pay received. You’ll find a list of the geographic areas considered tax-qualified combat zones on the IRS website.
Potential for Savings
Tax-free pay can provide a great opportunity to save extra money or reduce debt. In fact, IRS rules allow tax-free combat pay to be used for contributions to an IRA. Since your IRA can grow tax-deferred until you withdraw the money, contributing more today can provide a real savings boost over the years.
And if you choose a Roth IRA, you can do something even more beneficial: You can turn your tax-free pay into a source of potentially tax-free withdrawals in retirement, because qualified distributions of earnings are NOT taxed.
You can make a 2012 IRA contribution up to $5,000 ($6,000 if you were 50 or older by DEC 31), along with a spousal IRA contribution, until the APR 15, 2013, tax filing deadline, plus any applicable extensions. In 2013, annual contribution limits are rising to $5,500. Individuals who will be 50 or older on the last day of 2013 can contribute $6,500.
Extra time: When you’re defending our country, your tax return is probably the last thing on your mind. You can’t put off filing taxes forever, but you and your spouse may qualify for a deadline extension of at least 180 days after you’ve returned from a combat zone.
Extensions apply to several actions, including: Filing returns, paying taxes, making claims for refunds and contributing to IRA’s.
Before 2009, military spouses generally had to pay income taxes to the states where their spouses were stationed – but now you have a choice. Under the Military Spouses Residency Relief Act, military spouses can choose to be treated as if they still lived in their previous state. That could generate big savings if your previous state has lower tax rates – or NO income tax at all. But that’s not all: If they had income tax withheld in the state they’re living in, they may get a refund by filing a return in that state.
Generally, joint returns must be signed by both spouses. However, if your duties keep you away from home, your spouse can use a power of attorney to file a joint return on your behalf.
Selling Your Home
Taxpayers, whether civilian or military, can generally sidestep paying capital gains taxes on the sale of their home if they owned it and used it as their qualifying principal residence for two out of the five years preceding the sale. This rule can be used to exclude up to $250,000 in gains for individuals of $500,000 for married couples.
Military service members get some extra help when it comes to satisfying the two-out –of-five-years test. You’re allowed to suspend the five-year test period for up to 10 years when on qualified extended duty—that is, assigned to a duty station that’s at least 50 miles from the house for a period of 90 days or more. In effect, you can disregard the time you were ordered away from your home. The rules concerning this get a little tricky; learn more at the IRS website and consult a professional tax advisor.
Moving every few years gets expensive for active duty members. But if your move is a required permanent change of station, the IRS allows you to deduct the “reasonable unreimbursed expenses” of relocating yourself and your family.
Blessings from my family to yours
If you have any questions or concerns or would like to share a story or situation, contact me at Kim@MilitaryResourceBooks.com and visit my website for updated information and other resources not listed in my book.