Armed Forces Tax Guide (IRS Publication 3) – Official Tax References for Military Pay & Benefits

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Most military members should know about the free tax filing assistance programs that are available.  These programs range from free access to tax software to working with volunteers who actually prepare tax returns.  Many bases even continue this benefit for retirees. However, one of the best things you can learn to do is look beyond…

Most military members should know about the free tax filing assistance programs that are available.  These programs range from free access to tax software to working with volunteers who actually prepare tax returns.  Many bases even continue this benefit for retirees.

However, one of the best things you can learn to do is look beyond this year’s tax return and start tax planning.  For servicemembers and their families, there are many military-specific tax benefits, guidelines, and other ‘need to know’ items.  IRS Publication 3:  Armed Forces Tax Guide is one of the best resources for this tax information.

The Armed Forces Tax Guide contains a LOT of military-specific tax information.  Since the Armed Forces Tax Guide the authoritative source for tax information, anything you find is legitimate.  Below are five things that, while you might find elsewhere, the Armed Forces Tax Guide makes crystal-clear:

1. The Armed Forces Tax Guide specifically breaks out what type of compensation is taxable or not taxable.

You can generalize that types of pay (basic, incentive, special, etc.) are taxable, while allowances (like BAH, BAS, or clothing allowances) are not.  For example, CONUS COLA is taxable, while OCONUS COLA is not.  You wouldn’t get that with the pay/allowances rule of thumb, but it’s right there in Publication 3.

2. The Armed Forces Tax Guide contains detailed information about tax treatment of combat zone deployments (and related questions).

The Armed Forces Tax Guide is the base document by which your pay offices withhold taxes (or stop withholding based upon your combat zone tax exclusion).  However, sometimes your pay office is wrong.  When they are, this document allows you to resolve this on your tax return if needed.

For example, in 2015, I’d gone to Jordan on several exercise-related TDY visits, warranting the combat zone tax exclusion.  However, my pay office (for some reason), insisted on withholding taxes, because I was not directly involved in combat operations.  Even though my command certified travel to Jordan as being eligible for CZTE (which happens to be the combatant command overseeing combat operations in that part of the world), the pay office refused to budge.

No problem.  I took my travel documents to my tax preparer (an enrolled agent and tax professional).  We verified that this travel was indeed to one of the DOD-certified combat zone tax exclusion countries, and he made the adjustment to my return.

My 2015 return hasn’t been audited yet (usually tax returns are audited 2 years following the filing deadline).  If the IRS audits my return, I am perfectly able to justify my position…even though my pay office refused to stop my withholdings.

Related: Tax Benefits of Deployment – Combat Pay, Tax Filing Extensions, and Much More

3. The Armed Forces Tax Guide tells you how you can itemize little-known military-specific deductions.

For example, you generally cannot deduct upkeep of uniform items.  However, you can deduct:

  • Cost of upkeep for ‘military battle dress uniforms and utility uniforms that you cannot wear off duty.’
  • Articles not replacing regular clothing
  • Reservist uniforms if you can only wear them while performing duties as a reservist (i.e. not while doing your civilian job)

These deductions are categorized as miscellaneous itemized deductions, which are subject to a 2% AGI floor.  In other words, miscellaneous itemized deductions only count to the extent that these costs exceed 2% of your adjusted gross income (AGI).  For example, if your AGI is $50,000, then your miscellaneous itemized deductions would only count to the extent that they exceed $1,000.

Publication 529-Miscellaneous Deductions contains more detailed information about deductions subject to the 2% floor, such as tax preparation fees.  However, Publication 3 outlines military-specific examples, such as:

  • Professional dues. These are dues for professional organizations directly related to your line of work.  This doesn’t include officer club or NCO club dues.
  • Unreimbursed education expenses
  • Transportation expenses, including non-reimbursed travel for Guard or Reserve Drill duty.

4. The Armed Forces Tax Guide contains one-stop shopping for credits

You can use the guide as a quick snapshot for most of the tax credits that are available.

  • Child Tax Credit
  • Additional Child Tax Credit
  • Earned Income Tax Credit-EITC is one of the IRS’ biggest areas of concern regarding tax fraud and abuse. However, the IRS remains committed to helping to ensure that qualifying families do receive the EITC they deserve.  If the Armed Forces Tax Guide doesn’t have the information you need, you can find it at the IRS’ EITC Central website.
  • Credit for Excess Withheld Social Security Tax (only available if you have more than one employer, and the total withholdings exceeded $7,347.00 in 2016.

5. Details on tax-filing deadlines

While tax filing extensions are available for everyone, certain rules exist specifically for servicemembers.  Whether you’re filing from CONUS, OCONUS, or a combat zone, there are various extensions that apply.

  • CONUS: Everyone can receive an automatic 6-month extension by filing Form 4868.
  • OCONUS: There are 3 separate extensions that may apply to you (The Armed Forces Tax Guide contains more details on which ones are automatic, and which ones are discretionary—meaning you have to actually apply for them)
  • Combat zone: Not only does the guide tell you the rules (which are more complicated than this article will detail), but it gives examples for you to follow. Here is more information regarding Tax Deadline Extensions for Deployed Military Members.

Keep in mind that if you owe money on your return, in most situations (not including the combat zone-related extensions) the IRS will continue to charge interest from the regular due date (April 15 or the next working day) until the date you actually pay the tax.

Conclusion

While most people dread the thought of doing their taxes, it’s important to note the military-specific tax rules that are in place.  If you’re familiar with these rules, or at least being familiar with the Armed Forces Tax Guide, you can ensure that more of your money works for you.

What do you think?  What is the most interesting tax rule that you’ve read?

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About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and financial planner with Lawrence Financial Planning, a fee-only financial services firm. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.

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