Tax Tips for Active Military Personnel and Veterans

The following information was provided by the American Institute of Certified Public Accounts.The U.S. government offers special tax relief to members of the U.S. armed forces and veterans in recognition of their sacrifices to protect our nation.

Active Members of the Military

For those who are currently on active duty in the military, the pay of enlisted personnel and warrant officers serving in combat zones is tax-free, as is commissioned officers’ pay up to certain limits. Those who are injured and hospitalized do not pay tax during their hospitalization, within certain guidelines.

Extended time to file and pay their taxes is allowed for military personnel who serve in designated combat zones and civilians who serve in support of them, or those who are hospitalized outside the U.S. as a result of an injury received in a combat zone. They do not have to file or pay taxes until 180 days after their last day in the combat zone or of hospitalization. The extension also generally applies to the spouses of military personnel who are serving in combat zones.

Active members of the military who die in a combat zone, or die from wounds or disease received in a combat zone or in a terrorist or military action, can have their taxes forgiven for the year in which they died and perhaps for earlier years.

While members of the military on active duty are not required to pay taxes on their income they are permitted to use the amount of earned income to determine their eligibility for an Individual Retirement Account. Additionally, they can elect to make these contributions retroactive to 2004.

More information can be found in IRS Publication 3, "Armed Forces’ Tax Guide," which is available online. Visit www.irs.gov, then click on "Individuals" and look for "Tax Information for Members of the U.S. Armed Forces," or call the IRS free at (800) 829-3676 and ask for a paper copy. Live telephone assistance is available from the IRS by calling (800) 829-1040.

Veterans Pay is Taxable, but Not Benefits

Military retirement pay that is based on age or length of service is taxable, and must be included in income. On the other hand, veterans’ disability retirement payments received from the U.S. Department of Veterans Affairs are generally tax-free. Benefits for veterans administered by the department are not considered income. Veterans’ benefits include:

1. Education, training and subsistence allowances paid to veterans or their families;
2. Disability compensation and pension payments for disabilities paid to veterans or their families;
3. Grants paid by the Department of Veterans Affairs for homes designed for wheelchair use or for vehicles for veterans who have lost their sight or the use of their limbs;
4. Veterans’ insurance proceeds and dividends paid to veterans or their beneficiaries;
5. Interest on insurance dividends left on deposit with the Department of Veterans Affairs;
6. Dependent-care assistance benefits; and
7. Death benefits paid to survivors of military personnel members who died after Sept. 10, 2001.

Keep Military Records Handy

To qualify for benefits and to verify status as a veteran, access to military records may be needed. Find information on obtaining those records at the Department of Veterans Affairs Web site at http://www.va.gov/vaforms/.