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How Do I Apply for Armed Forces Tax Benefits?

Joe Wallace

Military service can earn military members certain armed forces tax benefits. Many know about the Combat Zone Tax Exclusion offered on federal income tax for those with qualifying military service.

But did you know there are other federal tax breaks including tax-free death benefits and options for military spouses who are business owners? These are just some of the options open to you in a given tax year.

Armed Forces Tax Benefits

What follows is not tax advice. It also does not necessarily apply at the state level–this article is for federal taxes only. It is sourced from the Internal Revenue Service and offered only as information. Talk to an IRS representative or a tax professional if you need assistance claiming or understanding any military tax benefits.

What applies in one tax year does not necessarily apply in successive tax years. If you see a tax break or deduction you wish to claim for a previous tax year, it may be necessary to apply for that deduction by filing an amended tax return. Such options are not always permitted depending on tax law in the year you filed and any successive rule changes that may apply.

Armed Forces Tax Benefits: How to Apply

There is no application process to take advantage of your armed forces tax benefits; you claim them as deductions on your federal income tax forms.

These tax breaks are not automatic. You will not receive the tax break if you do not claim the deductions on your federal income taxes. It makes sense to get help from a tax professional when claiming these military benefits for this reason–you never know what you might overlook when filling out the forms.

Federal Armed Forces Tax Benefits

Combat Zone Tax Exclusions and Extensions

Those who wish to apply for Combat Zone Tax Exclusions should check the IRS official site to determine what the current list for those approved exclusions includes. The list is always subject to change, but generally, those who serve in a combat zone, draw hazardous duty pay, or meet other requirements may be permitted to exclude some or all combat pay from federal taxes.

IRS.gov states, “If you are an enlisted member, warrant officer, or commissioned warrant officer, none of your combat zone pay is included in your income for tax purposes.”

At press time, servicemembers may be able to exclude pay for service in a combat zone, “even though that pay would otherwise be taxable” according to the IRS. But if you haven’t checked the IRS list of recognized combat zones, you may wish to look now–Afghanistan has been removed from that list for the 2022 tax season and beyond.

Double Check the IRS Combat Zone List

If you served in a combat zone that does appear on the IRS list, you may also qualify for an extension when filing your federal income taxes. This typically applies when you serve in the Armed Forces in a combat zone, have qualifying service outside of a combat zone, or served in the Armed Forces on deployment outside the United States in a contingency operation.

Death Benefits

Federal tax does not apply to the death gratuity paid to the surviving family members of a service member. This is true for “deaths occurring after 9/10/2001” according to IRS.gov.

Sale of a Principal Residence

A taxpayer on what the IRS describes as “qualified official extended duty in the U.S. Armed Services or the Foreign Service” is permitted to suspend the 5-year test period for home ownership and use “for up to 10 years during any period the Service member or spouse serves on qualified official extended duty as a member of the Armed Forces”.

Who qualifies? Service members who are on qualified official extended duty for more than 90 days or, “for an indefinite period” and are assigned to a duty station at least 50 miles from their main home. It may also apply in such cases when the taxpayer is residing in government quarters under government orders. This military tax benefit applies to one property at a time.

Deduction for Overnight Travel Expenses of National Guard and Reserve Members

Reservists with duty requiring them to stay 100 miles away from home while in service, “may deduct unreimbursed travel expenses as an above-the-line deduction” according to IRS.gov. Those were the rules applicable for the 2021 tax year, and your experience may vary.

This is a good example of an important benefit that should be used year after year, but you’ll need to check the current year’s tax laws to see what the requirements are to claim this deduction. In 2021, it was limited to “the rates for such expenses authorized for federal employees, including per diem in lieu of subsistence.” Tax laws are always subject to change, so check with IRS.gov to see if the options in 2021 are applicable in the current tax season.

Department of Defense Homeowners Assistance Program (HAP)

In the past, the IRS allowed a deduction for those who received HAP payments offered to offset negative effects on home values in areas affected by military base realignment and closures, also known as BRAC in the military community.

These may be deductible “as a fringe benefit” depending on the laws of the current tax season. However, IRS.gov reports that at press time in 2023, there are NO HAP payments being offered for BRAC. Check IRS.gov for the latest guidance on this military tax benefit in the current year.

In 2023, HAP deductions ARE offered to qualifying service members and surviving spouses under the following circumstances:

• • Those with VA-rated 30% or greater disability who “incur a wound, injury, or illness in the line of duty during a deployment in support of the Armed Forces on or after September 11, 2001”
  • Wounded DoD and Coast Guard civilian homeowners who have been reassigned “in furtherance of medical treatment or rehabilitation or due to medical retirement in connection with a disability incurred in the performance of their duties during a forward deployment occurring on or after September 11, 2001”
  • Surviving Spouses of fallen warriors who move within two years of the death of such employee or member.

Military Spouse Business Owners

The IRS directs military spouses who are also business owners to review their options under the rules in the IRS Small Business and Self-employed Tax Center. Military small business owners, as well as non-military entrepreneurs, have some important considerations for any disaster or COVID-19 relief (where applicable) as well as for family leave wages in the current tax season.

The IRS page for small businesses and self-employed tax filers includes information on how to run a business, how to prepare taxes, and links to the IRS Virtual Small Business Tax Workshop.

Other Military Federal Tax Benefits You Should Know About

The Internal Revenue Service advises military families that non-taxable military pay such as housing allowances and combat zone pay do not have to be listed on their federal income tax returns. But some DO choose to list this pay so they can claim more earned income for Earned Income Tax Credits. Why?

According to the IRS, “If you and your spouse do choose to include your nontaxable pay as earned income for the EITC, you may owe less tax and get a larger refund. The person who includes your nontaxable pay as earned income must include all of it.” IRS.gov has a Qualification Assistant, which may help you figure out your taxes both ways so you may pick the best option.

In previous tax years, the following benefits have been excluded from federal taxation either in whole or in part. To claim any deduction in the current tax year you should consult the IRS taxpayer guide for military members in the tax year you are filing in to see what is possible.

• Burial services
• Travel expenses of dependents to the burial site
• “Certain educational expenses” for dependents
• BAH (Basic Allowance for Housing)
• BAS (Basic Allowance for Subsistence)
• Government-paid housing and cost-of-living allowances abroad
• OHA (Overseas Housing Allowance)
• Moving allowances
• Dislocation Allowances
• Temporary lodging and temporary lodging expenses
• Travel allowances
• Transportation for you or your dependents during ship overhaul or inactivation
• Per diem

Check with a tax professional the IRS to see if there are any changes in these deductions for the current federal income tax filing season.