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Combating Your Tax Return – Part I: A Brief Overview of Special Tax Provisions for Members of the U.S. Armed Forces

I was recently approached by a friend, who is currently serving in the Navy, for help in the filing of his tax return. Before I could acquiesce, I needed to read up on the many special tax rules relating to members of the military. While not all-inclusive, below are some of these provisions:

  • Of the many different types of pay and allowances received by a member of the U.S. Armed Forces, several types are not taxable. The Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are two allowances excluded from income tax. In addition, a member is still able to deduct home mortgage interest and real estate taxes even if these expenses are paid with the member’s nontaxable BAH.
  • Many types of pay that would otherwise be included as taxable income are excluded if earned while a member is serving in a combat zone. “Combat zones” are specific areas designated by the President of the United States in which the U.S. Armed Forces are engaging or have engaged in combat. The word “earned” is important as the exclusion can apply to income received once the member is no longer serving in the combat zone. For example, if a member receives pay from accrued leave that was earned while serving in a combat zone it is not taxable. If a member reenlists while on duty in a combat zone and his or her reenlistment bonus is not received until the member has completed duty in said combat zone, it is also not taxable.
  • Generally, taxpayers are allowed to exclude up to $250,000 ($500,000 if married filing a joint return) of gain on the sale of a personal residence. This exclusion is allowed if the taxpayer owned and lived in the residence for at least two of the five years prior to the date of sale. Members of the Armed Forces are allowed to suspend this five year test period while they are serving on qualified official extended duty, that is are stationed at least 50 miles away from their home or are required live in Government quarters for a period of more than 90 days.

Stay tuned for Part II of “Combating Your Tax Return”…

Amanda Brown, CPA