Tax considerations for active duty military.

• Author: Bigej, Hannah

Active duty members of the U.S. armed forces have special tax considerations for both state and federal purposes. As a military spouse, the author has experienced three combat tours, military moves, and orders stationing her and her husband outside of their resident state.

This item is intended to address some issues regarding the treatment of both taxable and nontaxable income, taxability of housing options, and filing considerations. It also touches on the impact of the Servicemembers Civil Relief Act (SCRA) on military families' tax situations.

What Is Included in Gross Income?

For federal tax purposes, the U.S. armed forces includes personnel from both the reserve and regular units serving under the secretaries of Defense, Army, Navy, and Air Force, or in the Coast Guard (Sec. 7701(a)(15)). Members of the U.S. armed forces receive different types of income, reimbursements, and allowances. Each type must be carefully evaluated for inclusion or exclusion from the service member's gross income. Common types of income included in gross income include:

* Active duty pay;

* Special pay for foreign duty (outside the United States and District of Columbia, but not in a combat zone);

* Hardship duty pay;

* Enlistment/Reenlistment bonus pay; and

* Hazardous duty pay.

Certain types of pay that are excluded from gross income include:

* Combat zone pay;

* Disability compensation;

* Servicemembers Group Life Insurance received for injury or death

(SGLI);

* Family separation pay;

* Basic Allowance for Housing (BAH);

* Moving allowances;

* Per-diem travel allowances; and

* Medical, dental, and legal care. Specific guidelines define what constitutes a combat zone. Generally, combat pay can be excluded from income for tax purposes if the service member serves in an area that the president of the United States designates as such by an executive order (Sec. 112(c)(3)).

While combat pay is generally nontaxable, it is included in income for purposes of calculating the limits on contributions and deductions for an individual retirement account (IRA). In addition, a service member can elect to include combat pay in earned income when calculating the earned income tax credit.

It might not be clear to the service member what portion of his or her annual income is allocated to each income item. To determine if each portion of the service member's pay is reported properly and to his or her advantage, the service member should request from the military a Leave and...