Members of the Armed Forces serving overseas in Afghanistan and other countries are required to file US expatriate tax returns because they receive pay and allowances. We wrote an article about Military Contractors taxes and US expatriate tax returns earlier. The purpose of this article is to understand special rules for active members of Armed Forces. There are several armed forces benefits that military personnel are eligible for. Also, they can exclude the overseas income earned in a combat zone. Additionally, there are several perks that make the process of overseas tax preparation easier. The purpose of the below guide is to provide an overview of the most popular questions from the active members of Armed Forces serving abroad.
Guide about Armed Forces benefits and Military Personnel Taxes Abroad
Do Members of Armed Forces and Military pay income taxes?
The members of Armed Forces have to report their worldwide income and pay US taxes. Military members can receive a wide range of income listed below. However, special rules apply to active Military members servicing in a combat zone declared by an executive order of the President or in a qualified hazardous duty area. These active members of Armed Forces are eligible to exclude the income from the Combat zone on US expatriate tax return.
- Basic Pay
- Diving Pay
- Proficiency Pay
- Foreign Duty Pay
- Responsibility Pay
- Continuation Pay
- Enlistment Bonus
- Reenlistment Bonus
- Separation Pay
- Sea Duty Pay
- Student Loan Repayment
- Imminent Danger Pay
- Hostile Fire Pay
- Flight Duty Pay
- Medical/Dental Officer Pay
- Aviation Career Incentive Pay
- Veterinary Officer Pay
- Nuclear Qualified Officer Pay
- Personal Money Allowance
- Overseas Extension Bonus
- Accrued Leave Payment
- Scholarships (AFHPSP)
What is a Combat Zone?
A combat zone is any area designated by Executive Order of the President as an area in which the Armed Forces are engaged in a combat activity. The President must designate the dates that a combat zone becomes and ceases to be a combat zone.
Which income is eligible for the Combat zone exclusion?
One of the main Armed Forces Benefits is the combat pay exclusion. Enlisted members, warrant officers and commissioned warrant officers can serve only one or more days to qualify for the exclusion for the entire month.
Combat pay might be the following:
- Active duty pay for service in a combat zone
- Imminent danger/hostile fire pay
- Pay for accrued leave earned in any month while in a combat zone
- Reenlistment bonus if this extension occurs in a month served in a combat zone
- Part of student loan repayment for a year while in a combat zone
- Pay received for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other non-appropriated fund activities. However, this pay must be earned during the service in a combat zone.
- Awards for suggestions, inventions, or scientific achievements as long as the active members of Military made a submission while servicing in a combat zone.
Retirement pay and pension don’t qualify for combat zone exclusion on US expatriate tax returns.
Are Armed Forces benefits subject to US taxes?
The below benefits of active members of Military are not reported on form 1040.
- Professional Education
- Interment Allowance
- Death Allowance
- Evacuation Allowance
- Group-term Life Insurance
- Veterans’ Benefits
- Congressional Medal of Honor Pension
- Medical Benefits
- Survivor and Retirement Protection
- Plan Premiums Deducted from Military Pay
- Basic Allowance of Housing (BAH)
- Other Quarters Allowances
- OHA (Overseas Housing Allowance)
- Basic Allowance of Subsistence (BAS)
- ROTC Educational and Subsistence Allowances
- Moving Storage
- Dislocation Allowances
- Trailer Allowances
- Family Allowances
- Defense Counseling
- Uniforms (In Kind or Allowances)
Let’s review some of these Armed Forces Benefits in more details.
Active members of Military can deduct reasonable unreimbursed moving expenses due to a permanent change of station. Moving expenses include travel and cost of moving household goods and personal items on overseas tax return.
Per the IRS, the unreimbursed cost of uniform upkeep can be deducted on overseas tax return. Military members are not allowed to wear this uniform off duty.
Active reservists that travel more than 100 miles away from home can deduct unreimbursed travel expenses when they travel from home to reserve duty.
Payment for summer advanced training camp is taxable on overseas tax return. However, allowances for participation in advanced training are not taxed.
Civilian life transition
Job-hunting expenses like travel, resume preparation and job placement fees can be deducted to help ease the transition of military personnel.
What are tax deadlines to file Expatriate Tax Returns for Active Members of Armed Forces?
Military personnel in a combat zone have an automatic extension to file expat tax returns, pay taxes and file refund claims but they have to inform the IRS before filing for extension. The basic extension period is 180 days, however, it can be extended. There is no requirement to be involved in combat to get this extension. It is sufficient to be deployed in a combat zone to qualify for this extension. The extension is applied to the tax collection and examination of tax returns. During this period the IRS will not assess penalties or interest for a failure to file or to pay taxes during this time.
This is a short summary of Armed Forces benefits. Military personnel in a combat zone who have questions about overseas taxes should contact an expatriate tax professional that provides international tax services. International tax experts at Artio Partners are pleased to assist active members of Armed Forces and Military Personnel with various expat tax issues.