Tax Benefits for Members of the Military

Article Highlights:

  • Service Member Residence or Domicile
  • Service Member Spouse’s Residence or Domicile
  • Non-Taxable Allowances
  • Combat Zone Exclusion
  • Home Mortgage Interest Deduction
  • Home Property Tax Deduction
  • Home Sale Gain Exclusion
  • Moving Deduction
  • Death Gratuity Payments
  • Child Credit
  • Earned Income Tax Credit
  • IRA Contributions
  • Reservist’s Travel Expenses
  • Qualified Reservist’s Pension Withdrawals
  • Retired Military Disability Compensation

Military members benefit from a variety of special tax benefits. These include certain non-taxable allowances, non-taxable combat pay, and a variety of other special tax provisions. Here is a rundown on the most prominent of the tax benefits.

Service Member Residence or Domicile – A frequent question by service members is “What is my state of residence for tax purposes?” since one’s duty station may change multiple times while serving. Luckily, the government passed a law to solve this issue. A service member continues to retain his or her home state of residence for tax purposes, even when required to move to another state under military orders. This also applies to other tax jurisdictions within a state, such as for city, county, and personal property taxes. Thus, a service member will continue to file tax returns for his or her home state and not the state where he or she is stationed.

Service Member Spouse’s Residence or Domicile – In order to simplify the tax-filing requirements of military couples, the Military Spouses Residency Relief Act of 2009 allowed military spouses to claim the same state of domicile as their service member for tax purposes, provided they had also established domicile there.

As an example, say Chris resides in California with his spouse, who is in the military, and Chris has earned income in California but had established domicile with his military spouse in Virginia. Chris would be subject to Virginia income tax laws instead of those of California, and the couple would need file only one state return – in this case, Virginia. They have no obligation to file a California return.

Unfortunately, spouses who had not established domicile in the same state as their service member spouse and who had earned income in the state where their spouse was stationed were still forced to file with both states (assuming both states have income tax).

New for Years Beginning in 2018 – Thanks to the Veterans Benefits and Transaction Act of 2018, an individual married to a military member now has more choices. Under the act, a spouse can elect to have the same state of domicile as their service member spouse, even if they didn’t previously have the same domicile. If the non-military spouse doesn’t make that election, they can continue to choose to file in their own domicile state.

Making these choices can significantly impact the amount of state tax the spouse might have to pay. As an example, a spouse of a service member stationed in a high-income-tax state can elect to use the state of residency of the service member whose residence state has no or low state income tax and not be subject to the state taxes where his or her spouse is stationed.

Careful – It is tempting for a service member or their military spouse to declare their state of domicile to be without any state income tax such as Texas, Nevada, Florida, etc. That can get them in hot water if they do so without any connections to the state.

Non-Taxable Allowances – Members of the military benefit from a number of non-taxable allowances including:

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