“In this world, nothing can be said to be certain, except death and taxes.”
Benjamin Franklin
The holidays are over, and we are now in the year 2020. It’s a good time to start working on our 2019 taxes, because April 15 will be here before we know it. Taxes are overwhelming and complex, but there are numerous tax benefits for military families, so it is important to understand the basics.
1. Income
Servicemembers receive different types of pay and allowances. It is important to know which are considered as income and which are not. For servicemembers, income typically includes basic pay, special pay, bonus pay, and incentive pay.
2. Exclusions
Items normally excluded from income include combat pay, living allowances, moving allowances, travel allowances, and family allowances, such as family separation pay.
Combat pay exclusions are a substantial benefit to servicemembers and spouses. Combat pay is that compensation for active military service for any month while serving in a designated combat zone. This may also include a reenlistment bonus if the voluntary reenlistment occurs in a month while the servicemember is serving in the combat zone. Note that for commissioned officers, there is a limit to the amount of combat pay you may exclude.
The most common living allowances are Basic Allowance for Housing and Basic Allowance for Subsistence. Moving allowances are those reasonable, unreimbursed expenses beyond what the military pays for a permanent change of station.
3. Sale of Homes
Servicemembers and spouses often decide to purchase homes when moving to new duty stations. Often, we then turnaround and sell the homes a few years later before moving again.
What happens if you make a profit from the sale of this home? If you are fortunate enough to profit, you may qualify to exclude up to $250,000 of the gain from your income, or up to $500,000 if you file a joint return with your spouse. This is referred to as the Sale of Primary Home Capital Gain exclusion. Normally, this exclusion requires that you owned the home for at least two years and lived in it for at least two of the last five years. There is an exception, however, for servicemembers. If you were required to move as the result of a permanent change of station before meeting these requirements, you still may qualify for a reduced exclusion.
4. Claim for Tax Forgiveness
If a servicemember dies while on active duty, there are circumstances where the taxes owed will be forgiven by the IRS. Contact your closest Legal Assistance Office immediately for assistance using the website provided later in the article.
5. Extensions
If April 15 is quickly approaching and you are running out of time, remember, there are several different extension requests that military families may make. If the servicemember is in a combat zone, an automatic extension covers the time period the servicemember is in the combat zone plus 180 days after the last day in the combat zone.
6. Avoid Tax Scams
In November 2019, I wrote an article on common scams during the holidays. Unfortunately, scams are not limited to the holidays. There are numerous tax scams that have stolen personal information and millions of dollars. Scammers use the mail, telephone and email to initiate contact. Please remember that the IRS never initiates contact by email, text messages or on social media pages to request personal or financial information. The IRS initiates most contact through the regular U. S. Postal Service mail. Finally, the IRS never uses threats or bullying to demand payments.
If you have any questions, contact the IRS with a telephone number you find on its website (www.irs.gov) and verify what you received is legitimate before doing anything. To protect yourself, only use an IRS telephone number from its website. Do not use a telephone number you received that you suspect may be part of a tax scam from an email, text message or social media page.
7. Signing Tax Returns
Normally, both the servicemember and spouse must sign jointly filed tax returns. If one spouse will be absent during tax season, it is advisable to have an IRS special power of attorney, IRS Form 2848 (Power of Attorney and Declaration of Representative). You may access this form on the IRS website.
8. Military Tax Centers
Annually, many Legal Assistance Offices worldwide help servicemembers and spouses file their federal and state income tax returns starting in early February. Last year, for example, Army Legal Assistance personnel and volunteers prepared and filed over one hundred thousand Federal and over sixty-four thousand State income tax returns saving servicemembers and their families more than $34 million in tax preparation and filing fees.
If you don’t live near a military installation, visit the Department of Defense Military One Source website at https://www.militaryonesource.mil for additional information on accessing free online tax assistance.
9. Legal Assistance Offices
If you have specific tax questions or receive correspondence from the IRS, contact the closest legal assistance office to schedule an appointment. Use the Armed Forces Legal Assistance website (https://legalassistance.law.af.mil) that I provided in the October 2019 blog to locate your nearest legal assistance office. The quicker you address your issues, the better likelihood that you will successfully resolve them.
10. Valuable Tax Tip for 2020
Finally, here is a valuable tip for next year’s taxes. Does it seem like every year you are scrambling to find tax documents and receipts from throughout the tax year? Relieve this stress by getting a folder and writing “Tax Year 2020” on the front of it. Keep it in an easy-to-find place, and every time you receive a document or receipt that may impact your taxes place it in the folder. That way, at the end of this year, you will have most of the supporting documents you need already together.
11. Future Blogs
Be on the lookout for future blogs that will continue to discuss specific legal issues often encountered by servicemembers and military spouses. As always, this blog series will help to protect your family and you!
*Kerry L. Erisman is a military spouse, Dad of two awesome teenage boys, Army retiree after 28 years of active duty service, attorney, and Associate Professor with American Military University. He writes and teaches on important military spouse issues including leadership, critical thinking, and education. This blog is the fourth in a monthly series designed to inform military spouses of timely legal issues that may affect them and where to turn for assistance.