ARMED FORCES TAX GUIDE (IRS Publication 3)€¦ · Reporting repayment: Include in nondeductible contributions on line 1 of Form 8606. ... zone, unless there is clear evidence to

ARMED FORCES TAX GUIDE (IRS Publication 3)

Introduction

For tax purposes, the U.S. Armed Forces includes: commissioned officers, warrant officers, and enlisted personnel in all regular and reserve units under the Secretaries of the Defense, Army, Navy and Air Force. U.S. Armed Forces also include the U.S. Coast Guard.

Included in Gross Income

Basic pay Special pay Bonus pay Other pay Incentive pay Differential wage payments Qualified reservist distribution (QRD) Thrift Savings Plan (TSP) distributions

Excluded from Gross Income

Combat zone pay Death allowances- Ex) Death gratuity Family allowances Living allowances- Ex) Basic Allowance for Housing (BAH) Moving allowances- Ex) Military base realignment and closure benefit Travel allowances In-kind military benefits

Income from sources outside the U.S. must be reported on tax return. Military Spouses Residency Relief Act (MSRRA)

Civilian spouses of active duty U.S. military can retain prior residence for tax purposes.

Foreign Source Income from Non-military service sources may qualify for an exclusion up to $95,100 (2012) (Service Pay not excludible)

Foreign Source Income

Pay may be subject to community property laws depending on your:

marital status domicile nature of the payment and state of residence

AZ, CA, ID, LA, NV, NM, TX, WA, WI

Community Property

Armed Forces Reservists can deduct unreimbursed travel expenses on line 24 of Form 1040 verses an itemized deduction. Limits:

Travel must be more than 100 miles away from home in connection with performance of services.

Limited to federal reimbursement rates.

Adjustments to Income

How to Report:

Complete Form 2106 or Form 2106-EZ

Enter on Form 1040, line 24, up to federal rate of expenses included on line 10 of 2106 or line 6 of 2106-EZ

Subtract this amount from total on line 10 of 2106 or line 6 of 2106-EZ, and deduct the balance as an itemized deduction on Schedule A of Form 1040, line 21.


Example: Captain Harris, a member of the Army Reserve, traveled to a location 220 miles from his home to perform his work in April 2011. He incurred $1,524 of unreimbursed expenses consisting of $224 for mileage (440 miles x 51 cents per mile), $300 for meals, and $1,000 for lodging. He also had other deductible mileage expenses of $110 for several trips to a location 20 miles from his home. Only 50% of his meal expenses are deductible. He shows his total deductible travel expenses of $1,484 ($224+$150 (50% of $300)+ $1,000+ $110) on Form 2106, line 10. 1) He enters the $1374 ($224+150+$1,000) for travel over 100 miles from home on Form 1040, line 24. 2) He then subtracts that $1,374 from the amount on Form 2106, $1,484, and enters $110 on Schedule A (Form 1040), line 21. (The $110 is subject to a 2% of AGI floor)


If you or your spouse was covered by an employer-maintained retirement plan at any time during the year, you may not be able to deduct contributions to an individual retirement plan.

Armed Forces members are considered covered by an employer-maintained retirement plan.

Individual Retirement Arrangements

Combat Pay:

Combat pay is included in your compensation when figuring the limits on contributions and deductions of contributions to IRAs.


Qualified Reservist Distributions: Not subject to the 10% additional tax on early distributions from certain retirement plans.

Distribution is qualified if:

–  You were called to active duty after Sept 11, 2001. –  You were called to active duty for >179 days. –  The distribution is from an IRA or from amounts attributable to

elective deferrals under 401(k) or 403(b). –  The distribution was made no earlier than the date of the call to

active duty and no later than the close of the active duty period.


Qualified Reservist Repayments Repayments to an IRA are subject to these rules:

Limit: Cannot be more than your qualified reservist distributions.

When: You can not make repayments more than 2 years after active duty period.

No deduction: You cannot deduct repayments.

Reporting repayment: Include in nondeductible contributions on line 1 of Form 8606.


Time and distance tests apply when deducting expenses. However, Armed Forces on active duty who move due to a permanent change of station can deduct all unreimbursed moving expenses on Form 3903.

Moving Expenses

Permanent change of station:

A move from your home to 1st post of duty.

A move from one post of duty to another.

A move from last post of duty to home.

Moving Expenses

Spouse and dependents:

For spouses/ dependents of members of the Armed Forces that desert, are imprisoned, or die, a permanent change of station for you includes a move to member’s place of enlistment, your or the member’s home, or a nearer point in the U.S.

Moving Expenses

Services or reimbursements provided by the government:

Unless total reimbursements are more than your actual moving expenses, do not include as income.

If they exceed the cost of moving, report on line 7, Form 1040.

Moving Expenses

Services or reimbursements provided by the government:

Use Form 3903 to deduct expenses that exceed reimbursements and allowances.

Do not deduct expenses reimbursed by an

allowance you did not include in income.

Moving Expenses

Deductible Moving Expenses:

Moving household goods and personal effects is deductible but does not include moving goods you bought on the way from old home to new home.

You can include the cost of insuring and storing goods for 30 consecutive days after move to new location.

Moving Expenses


Travel by car is deductible up to 23 cents a mile (2012) or for actual out-of-pocket cost of gas and oil. Parking and tolls can be claimed under either method. Lodging is deductible but not meals.

Moving Expenses


Foreign moves expand the deductible expenses to include moving goods and effects to and from storage and storing items for part or all of the time the new job location remains the main job location.

Moving Expenses


Report expense deductions on Form 3903. Carry deduction from Form 3903 to Form 1040, line 26.

Moving Expenses

While in a combat zone enlisted members, warrant officers, or commissioned warrant officers can exclude the following amounts from income:

Active duty pay, imminent danger/hostile fire pay, reenlistment bonus, pay for accrued leave, awards, student loan repayments. Box 1 on Form W-2 should not include any military pay excluded from your income under combat pay exclusion provisions.

Combat Zone Exclusion

A combat zone is any area the U.S. President designates as an area the Armed Forces are engaging in combat. Current Combat Zones:

Afghanistan area, the Kosovo area, the Persian Gulf area.


Hospitalization:

If hospitalized while serving in a combat zone, the injury or disease will be presumed to be incurred in the combat zone, unless there is clear evidence to the contrary.

If hospitalized after leaving a combat zone and the injury or disease was incurred while you were serving in a combat zone, you can exclude military pay earned while hospitalized.


Service outside a combat zone is considered inside a combat zone if:

The DoD determines the service is in direct support of operations in the zone. The service qualifies for special military pay for duty subject to hostile fire or imminent danger.



•  Combat pay for commissioned officers is non taxable subject to a limit of the highest ranking enlisted pay grade.

Resident aliens are individuals who meet the “green card test” or the “substantial presence test” for the calendar year. These tests are explained in Pub. 519.

Alien Status

Spouse of Resident Alien:

A nonresident alien spouse can be treated as a resident alien if they meet qualifications.

A statement must be attached to the joint return for the 1st year the choice applies.

If the spouse has substantial foreign income, there may be no advantage to this choice.

If no choice is made, you can file married filing separately.

Alien Status

Nonresident aliens do not meet the requirements discussed earlier to be a resident alien. If you are required to file taxes, file Form 1040NR, or Form 1040NR-EZ (used for those without dependents).

Alien Status

Dual-status as both a nonresident and a resident alien typically occurs in the year you arrive or depart the US. While a nonresident, you are only taxed on income from U.S. sources.

Alien Status

Main home sales are tax excluded up to $250,000 every 2 years. ($500,000 MFJ) The 5-year period ending the date of sale must include 2 years of ownership and occupancy. Armed Forces members may suspend up to 10 years on qualified official extended duty. Special rules apply regarding conversion of principle residences into rental property.

Sale of Home

Itemized deductions are reported on Schedule A of Form 1040: Medical, Taxes, Interest, Charitable Contributions, Casualties/Thefts, Investment costs Miscellaneous itemized deductions must be reduced by 2% of your adjusted gross income. Pub. 529 explains what is not subject to the reduction.

Itemized Deductions

Employee Business Expenses: Reimbursement

These deductions are subject to the 2% limit. File form 2106 or 2106-EZ to claim expenses. You do not need to file this form if you are claiming only unreimbursed expenses on uniforms, professional society dues, and work-related educational expenses.

Itemized Deductions

Employee Business Expenses: Reimbursement

If expenses are more than reimbursement, excess expenses are deductible (subject to 2%limit). File Form 2106 or 2106-EZ to report.

Itemized Deductions

Employee Business Expenses: Travel Expenses

Unreimbursed travel expenses can be deducted only if travel is

work related.

not related to travel while at a permanent duty station (Permanent duty station is considered home).

not in conjunction with leave or personal travel.

Itemized Deductions

Employee Business Expenses: Transportation

Transportation expenses to meetings and between multiple work locations is deductible as well as travel from home to a temporary (less than 1 year) workplace. Travel within your metropolitan area is nondeductible.

Itemized Deductions

Employee Business Expenses: Transportation

Meeting of an Armed Forces reserve unit is a second place of business if it is held on a day you work at your regular job. The travel expense is deductible of getting from one workplace to another. Overnight travel away from home to a guard or reserve meeting is deductible.

Itemized Deductions

Employee Business Expenses: Uniforms

If prohibited from wearing a uniform off duty, you can deduct the cost and upkeep of the uniform. Qualifying articles are not able to replace regular clothing.

Itemized Deductions

Employee Business Expenses: Professional Dues

You can deduct unreimbursed dues paid to professional societies related to your military position other than officers’ clubs.

Itemized Deductions

Employee Business Expenses: Educational Expenses

Expenses for work-related education are deductible if:

It is required by your employer or the law. The education maintains or improves skills needed.

Expenses are not reimbursable if:

Education is needed to meet minimum job requirements.

Education is part of a program of study that is needed for a new trade or business.

Itemized Deductions

Employee Business Expenses: Repayments

Repayments of $3,000 or less are deducted from your income in the year you repaid it. If wages, deduct on Schedule A of 1040, line 23 (subject to the 2% AGI floor). Repayments of >$3,000 see Pub. 525.

May qualify for a credit as a “claim of right”, consult a knowledgeable professional tax practitioner.

Itemized Deductions

First-Time Homebuyer Credit

Expired provision relative to 2012.

Credits

Child Tax Credit

Child in this instance is defined as your actual child or step child, foster child, adopted child, sibling, step sibling, half sibling, or a descendent of any of them. Must be under age 17 at the end of the tax year. To qualify for this credit the child must not have provided over half of their own support in the tax year.

Credits

Child Tax Credit

The child must have lived with you for more than half of the tax year and are claimed as a dependent on your return.

They can not file a joint return for the year.

Must be a resident alien, U.S. national, or U.S. citizen.

For each qualifying child you must check the box on Form 1040 for 1040A, line 6c, column (4).

Credits

Child Tax Credit

Maximum amount you can claim for the credit is $1,000 for each qualifying child.

You must reduce your credit if

The amount on line 46 on 1040 or line 28 of 1040A is < the credit.

Your modified AGI is > the amount shown below for your filing status: Married filing jointly: $110,000, Single or HoH: $75,000, or Married filing separately: $55,000.

Credits

Additional Child Tax Credit

For individuals who receive less than the full amount of the child tax credit, you may receive the additional credit even if you do not owe any tax.

Credits

Earned Income Credit (EIC)

Persons with a qualifying child may take this credit if they meet a list of requirements found on Publication 3. There are AGI caps, and filing rules. To claim you must fill out Schedule EIC and attach to either 1040 or 1040A.

Credits


Your child is a qualifying child if they meet the four EIC tests of:

•  Relationship: child, step child, foster child, adopted child, or descendant of any of them.

•  Age: Under age 19 at end of tax year. Full time student and under age 24 at end of tax year.

•  Residency: Child lived with you in U.S. > 1/2 of the yr •  Joint Return: Child can not file a joint return.

Credits


Persons without a qualifying child may still be eligible to take the EIC if they meet specific rules found in Pub. 3. Income limits, age restrictions, filing restrictions, and citizen/location restrictions apply.

Credits


Earned Income includes: Wages, Salary, Tips, Net earnings from Self Employment, Gross Statutory Employee Income and Non taxable Combat pay if elected to be included, discussed in a moment.

Credits


Income not treated as Earned Income for EIC purposes: • Any military pay subject to Combat Zone Exclusion • Basic Housing Allowance • Basic Allowance for Subsistence • Other nontaxable employee compensation • Interest and Dividends • Veterans’ Benefits • Other sources: e.g. Unemployment comp, alimony

Credits


You can elect to include your nontaxable combat pay in your earned income, however you should calculate your EIC both ways before making an election.

If your earned income without your combat pay is equal to or more than these amounts, you will not benefit from including your combat pay:

$6,050 if you have no qualifying children $9,100 if you have one qualifying child $12,750 if you have two or more qualifying children

Credits

Credit for Excess Social Security Tax Figure the credit by determining if an excess of social security was deducted from your pay.

Credits

1. Add all social security tax withheld (but not more than $6,621.60 for each employer). This tax should be shown in box 4 of your Forms W-2. Enter the total here

1.

2. Enter any uncollected social security tax on tips or group-term life insurance included in the total on Form 1040, line 60, identified by "UT"

2.

3. Add lines 1 and 2. If $6,621,60 or less, stop here. You cannot claim the credit

3.

4. Social security limit 4. $6,621.60 5. Excess. Subtract line 4 from line 3 5.

Tax liability can be forgiven or refunded if a U.S. Armed Forces member dies:

While in active service in combat zone.

From wounds or disease received in a combat zone.

From wounds or injury incurred in a terrorist or military action.

Forgiveness of Decedent’s Tax Liability

Combat Zone Related Forgiveness

Forgiveness applies to the tax year death occurred and any earlier tax year ending on or after the 1st day the member served in a combat zone.

Any unpaid taxes for years ending before the member began service in a combat zone will be forgiven.

The beneficiary of the deceased does not have to pay tax on income that would have been included in the gross income of the year of the death.


Combat Zone Related Forgiveness

Service outside the Combat Zone: If the service was outside the combat zone but was in direct support of military operations in the zone and qualified the member for special pay for hostile fire or imminent danger, the combat zone forgiveness rules apply.


Terrorist or Military Action Related Forgiveness

A terrorist or military action is any terrorist activity primarily directed at the U.S. or allies or any military action involving U.S. Armed Forces.

Forgiveness applies to the deceased armed forces member in the tax year death occurred and any earlier tax year in the period beginning with the year in which the wounds or injury occurred.


Claims for Tax Forgiveness

File Form 1040 with a W-2 if a tax return has not been filed.

File Form 1040X if a tax return has already been filed. A 1040X form will be required for every individual year in question.

See Pub.3 for the required text needed to identify the return with the correct combat zone or terrorist designation.



Necessary documents:

Form 1310, Statement of Person Claiming Refund Due to a Deceased Taxpayer

Certification from the DoD on DD Form 1300, Report of Casualty or signed letter from Dept. of State or Director General of Foreign Service with required details from Pub. 3.



The period for filing a refund claim is 3 years from the time the return was filed or 2 years from the time the tax was paid, which ever is later. Early returns are considered filed on the due date, usually April 15th.

Those eligible for combat zone treatment may have their claim for credit or refund extended.

These special claims should be mailed to: Internal Revenue Service 333 W. Pershing, Stop 6503, P5 Kansas City, MO 64108


If you file on paper, follow instructions on forms 1040, 1040A, or 1040EZ. - File a paper return with the IRS service center for the location where you live. If you are stationed in Maine, live there, but have a permanent home address in California, file tax returns with the Maine service center. Regular due date is April 15 or next business day if the 15th is a weekend or legal holiday.

Filing Returns

Extensions may be available with various rules.

You can receive an automatic 6-month extension if you file 4868 by the due date, pay a portion of your expected tax, and you are within the U.S. The amount paid will be entered on line 68, 1040 or line 41, 1040A.

Filing Returns


Automatic 2-month extensions apply to U.S. citizens or resident aliens who live outside the U.S. and Puerto Rico or their main post is outside U.S. and Puerto Rico during the due date. Interest will be charged on amounts not paid. Extensions of file time are not an extension of time to pay tax due.

Filing Returns


Exceptions to the pay due date are for Armed Forces members who may qualify to delay payment of income tax due before or during your military service.

Tax becomes due no more than 180 days after release from service. - Pay the tax in full with no interest or penalty

Filing Returns

Signing Returns Spouse in combat zone, in missing status, incapacitated, or died during the year: Spouse can sign and attach a statement to the return explaining the reason spouse could not sign.

Filing Returns

Service that Qualifies for an Extension

Serving in a combat zone.

Missing status.

Support personnel for a combat zone.

Spouses serving in a combat zone.

Extension of Deadlines

Length of Extension is180 days after the later of:

The last day you are in a combat zone or contingency operation.

The last day of any continuous qualified hospitalization.

Any days of the 3 ½ month period between Jan. 1st and April 15th that were left when you entered the combat zone are added to the 180 day extension.

Extension of Deadlines

To qualify:

You must be performing military service and notify the IRS that your ability to pay has been affected by your service.

You are then allowed up to 180 days after release of service to pay the tax, interest free.

Deferral of Payment

To request deferment:

You must have a payment agreement or notice before you can request a deferral.

Your request must include: Your name, SSN, monthly income and source before military service, current monthly income, rank, date you entered service, date you are eligible for discharge. Copy of orders encouraged.

Deferral of Payment

The maximum interest rate you can be charged is 6% per year of obligations or liabilities incurred before your entry into military service. You can apply for a reduced rate if your military service affects your ability to pay. IRS must receive a copy of your orders with the request no more than 180 days after release from service.

Maximum Rate of Interest

Montgomery GI Bill

•  Provides for tax free educational assistance, however service person pays –  Enlisted automatically enrolled; $100 per month for

first 12 months of service ($1,200 total cost) •  May elect out, must be done within 3 days of initial posting.

–  Officers must elect to participate within 3 days of initial service posting. $100 per month for first 12 months of service ($1,200 total cost)

Montgomery GI Bill

•  Benefits paid –  Public School Tuition and Fees paid in full –  Private School Tuition and fees up to $18,077 per

year –  May have additional benefits

•  Housing allowance •  Books •  One time moving expenses from rural area of $500

Montgomery GI Bill

•  Length of Benefits –  Up to 36 months over 10 years post separation –  Can be transferred to a dependent under certain

circumstances –  Can opt to increase benefits for $600…increases

monthly amount up to a max of $150 for 36 months

Montgomery GI Bill

•  Maximum Benefits Available –  ~$54,000 for tuition and fees –  ~$5,400 if upgraded benefits purchases –  Housing and books allowances

–  Not bad return for a $1,800 investment plus service time.

–  Benefits are tax free…the $100 payments not subject to tax

Service Members Civil Relief Act of 1993

•  Caps interest rates to 6% on debt incurred before active duty: credit card, mortgages, car loans (May not be so helpful today with low interest available)

•  Delay of Civil Action –  Courts can stay the execution of any judgments,

vacate or stay any garnishment, or attachment of legal debt obligation for all of active duty plus 90 days afterwards.


•  Lease provisions: Dependents are protected from eviction if rent does not exceed $2,831 per month for up to 3 months if the landlord obtains a court order and the court finds that the active duty materially and adversely affects the family’s ability to pay.

•  Lease can be terminated by the service person based on active duty orders (housing and vehicles may be allowed)


•  Real Estate Debt: –  If called to active duty (reservist) and monthly income

goes down causing a default situation. The service person can request a court order to allow reduced or placing payments on hold while on active duty.

–  Once service person returns to “normal” life, the debt term is extended by the active duty time.


•  Statute of Limitations are extended for the entire period of active duty serviced. –  E.g. A statute of limitations of 5 years to file suit is in

affect, 2 of those years have passed, a person enlists in the armed forces, the remaining 3-year period is suspended until the person leaves the service.

•  This suspension is a two way street relative to the parties •  This suspension DOES NOT APPLY to federal tax law.

The IRS website at IRS.gov is available 24/7.

Many services are also available via phone at 1-800-TAX-FORM (1-800-829-3676). Ask tax questions at 1-800-829-1040.

Taxpayer Advocate Service (TAS) can help if you can not resolve a problem with the IRS. www.taxpayeradvocate.irs.gov. You can find your local advocate at www.irs.gov/advocate.

You can find more services in Pub. 3

How to Get Help

Find Us Online http://www.facebook.com/PersonalFinance4PFMs http://blogs.extension.org/militaryfamilies/ Twitter:

@moneytalk1 @mikegutter @MollyCHerndon @DollarDecisions @dfougie

Homefront Connections – Personal Finance group

Documents

ARMED FORCES TAX GUIDE (IRS Publication 3)€¦ · Reporting repayment: Include in nondeductible contributions on line 1 of Form 8606. ... zone, unless there is clear evidence to