As we remember those who have served on Veteran’s day, we offer our thanks to them. Below are some tax advantages for those (both in the past and present) who have served their country.
Combat Pay Exclusion
If you or your spouse serves overseas, certain income you receive may be excluded from your taxable income. This income is referred to as combat pay. Your combat pay can be excluded if you serve in a combat zone designated by the president in an Executive Order, a qualified hazardous duty area designated by Congress, or an area outside of the combat zone or qualified hazardous duty area when the Department of Defense states the service you are providing is directly supporting the military operations in a combat zone or qualified hazardous duty area. It is not required that you show the exclusion on your tax return. The income reported in box 1 on your Form W-2 should not have your combat pay income included in that amount. Your combat pay will be reported in box 12 with code Q on your Form W-2. If your combat pay is included in box 1 of your Form W-2, then you must ask for a corrected Form W-2.
Earned Income Tax Credit
Members of the Armed Forces do not have to include their non-taxable income as earned income when figuring out this credit. You can choose to exclude your combat pay from your earned income for the EITC for it may reduce the amount of tax you owe and it could increase the refund that you receive. Calculate your taxes with and without your combat pay included in your earned income to determine the most tax-efficient result.
If you or your spouse serves outside of the U.S. or in a combat zone, you may qualify for an automatic extension. In order for military personnel who are not serving in a combat zone, to qualify for an automatic two-month extension of time to file without having to file the usual extension form, they must be on an assigned tour of duty outside of the United States and Puerto Rico during the entire period that the return is due. However, the automatic extension does not extend the payment of any tax due. If you are filing a joint return, only one spouse needs to qualify to take the automatic two-month extension. If you are filing separate returns, only the spouse that meets the qualifications can take the automatic two-month extension.
For military personnel serving overseas in a combat zone, different rules apply. The IRS automatically extends the deadline of time to file your tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS if one of the following is true:
- The spouse serving overseas is serving in a combat zone or has qualifying services outside of a combat zone.
- The spouse serving overseas is serving on deployment outside the United States away from their permanent duty station participating in a contingency operation.
The same rules apply for support personnel who serve in a combat zone or a contingency plan such as Red Cross workers, accredited correspondents, and civilians, under the direction of the Armed Forces, supporting the military.
Spouses of the individuals serving in these areas are also entitled to the same deadline extensions as long as the extension is not for a return with a tax year beginning more than two years after the date the area stopped being considered a combat zone or the contingency operation ended and any periods during which the qualifying spouse was hospitalized in the United States for injuries incurred in a combat zone or contingency operation.
Generally, if a couple is filing a joint return, both tax payers have to sign the return. There are some exceptions if a spouse is serving overseas or in a combat zone. If a spouse is serving overseas, but not in a combat zone, there are two options when filing a joint return:
- One spouse can prepare and sign the return, send it to the other spouse to sign, leaving enough time so that the return can be filed by the due date; or
- The spouse who will be serving overseas on the due date can file an IRS Power of Attorney, designating the spouse who is in the United States to sign the return for them.
If your spouse is serving in a combat zone, then the rules are a little different. You do not need to have a legal durable power of attorney or another statement saying you may sign for your spouse in order for you to sign the tax return for your spouse. You must attach a signed statement to the tax return stating that your spouse is serving in a combat zone
As always, you can contact us if questions.
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