Opinion: 5 tax land mines active-duty military must avoid

Published: Apr 15, 2019 9:14 a.m. ET

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Special tax provisions exist for the military

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By

AnthonyP. Curatola

Congress has created a host of special tax provisions for the military. Unfortunately, there also are a lot of land mines. Here’s how to avoid five of them:

The deadline for filing taxes gets tricky fast

Unlike the rest of us, active-duty military assigned outside the U.S. and Puerto Rico on April 15 get an automatic two-month extension for filing their tax return, no form required. This also covers the military spouse for those filing separately as long as that person also is out of the country. (Note, however, that interest accrues on any amount owed beginning April 16, as it does for everyone else).

Taxpayers who need more time can file Form 4868 to get an additional four-month extension until Oct. 15. That’s the same form non-military filers use for requesting an automatic 6-month extension from April 15.

If you’re in the military, out of the country and think you need more than a two-month extension, it may be simpler to just file Form 4868 by April 15.

Here’s where it gets even more complicated.

The deadline for filing a tax return after being in a combat zone or in the hospital recovering from an injury incurred while in a combat zone is a complex calculation. (No filing is required while in a combat zone or while hospitalized.) Military members as well as those supporting the armed forces (such as civilians and Red Cross personnel) have 180 days — plus any unused days from the tax-filing period — from the day they leave the combat zone.

This example shows how it works:

Captain Marie Zoe is deployed to a combat area on April 1, 2017 and leaves the combat area to return home on May 1, 2018. Her unused days from the 2016 tax filing period is 17 days (April 1, 2017 – April 17, 2017) because tax returns for 2016 are due on April 17, 2017. Although she could have filed her return before she deployed, she is not penalized for not doing so.

• The deadline for filing her 2016 tax return is Nov. 13, 2018, which is 197 days (180 days plus 17 unused days) after May 1, 2018 (date leaving the combat area).

• The deadline for filing her 2017 tax return is Feb. 9, 2019, which is 285 days (180 days plus 105 unused days (Jan. 1, 2018–April 15, 2018) after May 1, 2018 (date leaving the combat area).

• The deadline for filing her 2018 tax return is April 15, 2019 because the extension period will fall before the normal tax filing period begins for a 2018 tax return.

The twists in taxes on combat pay

For enlisted members of the military, warrant officers and commissioned warrant officers, combat pay is entirely excluded from income and therefore is not taxed. But the exemption isn’t so straightforward for commissioned officers. They can exclude up to the highest rate of an enlisted member’s pay plus imminent danger/hostile fire pay. So their combat pay above $8,586 (for 2018) is taxable.

The definition of combat zones is found in IRS Publication 3.

What about tax credits like child tax credits?

This gets even more complicated. Congress has created provided a special provision for military personnel in combat areas so they can still claim certain tax credits such as the child tax credit, the earned income credit, and the child and dependent care credit.

Most tax credits are based on a person’s earned income (taxable income), so those who earn too much can’t claim the benefit.

Nontaxable combat pay is not earned income, so these military families may not be able to claim the credit. To keep that from happening, Congress decided taxpayers with nontaxable combat pay can elect to include or exclude the total amount when determining their qualification for these credits and still treat the combat pay as nontaxable.

Better yet, if both spouses have nontaxable combat pay, they can individually decide to include or exclude their nontaxable combat pay on a jointly filed tax return. So both spouses can include or exclude all their combat pay or one spouse can include it and the other spouse can exclude it. The decision allows the family to maximize their tax benefits.

These are the key tax breaks:

The Child Tax Credit has been increased to $2,000 per qualifying child by Tax Cuts and Jobs Act of 2017. In addition, the maximum income for claiming this credit has been increased to $400,000 for taxpayers that are married filing jointly and $200,000 for all other taxpayers.

The Earned Income Credit provides a tax credit to those taxpayers with income below a threshold that is based on the number of qualifying children. Low-income individuals without children also qualify (less than $15,270, or less than $20,950 for those married filing jointly).

The Child and Dependent Care Credit provides a tax credit to a taxpayer who pays someone to take care of a dependent who is under age 13 by year-end or is disabled. The credit is based on the taxpayer’s earned income and has a maximum amount of $3,000 for one qualifying dependent and $6,000 for two or more qualifying dependents.

To claim any of these tax credits, a qualifying child must have a valid Social Security number by the due date of the taxpayer’s filing date, including extensions.

Combat pay is ignored for this credit

A taxpayer may qualify for the Additional Child Tax Credit of up to $1,400 but it is based only on earned income. That means nontaxable combat pay isn’t taken into account.

But it’s the opposite for IRAs

Nontaxable combat pay is included in a taxpayer’s income when determining eligibility for a tax-deductible IRA contribution (income limits vary depending on tax-filing status and whether there is a retirement plan at work) or a non-deductible Roth IRA contribution. But if this taxpayer’s income (including nontaxable combat pay) exceed those limits, he or she can still make a nondeductible IRA contribution.

No one ever said taxes were simple. So thank you for your service but consult a qualified tax person to insure your proper interpretation of these rules.

Anthony P. Curatola is the Joseph F. Ford Professor of Accounting at Drexel University’s LeBow College of Business and editor of the Taxes column for “Strategic Finance”.

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