Special Tax Breaks for Military Members

Military service demands sacrifices -- some personal, some financial. But in many cases, Uncle Sam recognizes those hardships and offers special privileges to compensate. When it comes to paying taxes, for example, military members can claim a host of tax advantages that aren't available to civilians. Here are a few to keep in mind:
Combat Pay Perks

Freedom from Taxes

If you serve in a combat zone as an enlisted service member or as a warrant officer for any part of a month, all your income for that month is exempt from federal taxes. For officers, the monthly exclusion is capped at the highest rate of enlisted pay, plus any hostile fire or imminent danger pay received. You’ll find a list of the geographic areas considered tax-qualified combat zones on the IRS website.

Potential for Savings

Tax-free pay can provide a great opportunity to save extra money or reduce debt. In fact, IRS rules allow tax-free combat pay to be used for contributions to an IRA. Since your IRA can grow tax-deferred until you withdraw the money, contributing more today can provide a real savings boost over the years.

And if you choose a Roth IRA, you can do something even more beneficial: You can turn your tax-free pay into a source of potentially tax-free withdrawals in retirement, because qualified distributions of earnings are not taxed.

You can make a 2012 IRA contribution up to $5,000 ($6,000 if you were 50 or older by Dec. 31), along with a spousal IRA contribution, until the April 15, 2013, tax filing deadline, plus any applicable extensions. In 2013, annual contribution limits are rising to $5,500. Individuals who will be 50 or older on the last day of 2013 can contribute $6,500.

Your combat-zone service also entitles you to a special perk within your federal Thrift Savings Plan. While annual contributions are normally limited to $17,000 in 2012 and $17,500 in 2013, you may invest as much as $50,000 when serving in a combat zone in 2012 and $51,000 in 2013. The dollars that go into your TSP tax-free also come out tax-free -- though you will owe tax on any earnings you make on those dollars.
Exceptions to the Rules

Extra Time at Tax Time

When you're defending our country, your tax return is probably the last thing on your mind. You can't put off filing taxes forever, but you and your spouse may qualify for a deadline extension of at least 180 days after you've returned from a combat zone.

Extensions apply to several actions, including:
Filing returns
Paying taxes
Making claims for refunds
Contributing to IRAs

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