Tax laws favoring military combatants

By Tom Philpott: Military Update

If tax laws mirror a nation’s values, then America clearly values its military personnel, and more so today than a few years ago.

Combat-zone tax exclusions, combined with changes to the Earned Income Tax Credit (EITC) and child tax credits, have reduced or even wiped out the tax liability of thousands of military families. For many, taxes have been replaced by extra cash in the form of refundable tax credits.

“That’s exactly what these credits were designed to do for the low-income individual,” said Vincent Mullett, a retired Marine and a senior IRS tax specialist in San Marcos, Calif., near Camp Pendleton. But Mullett said he knows of colonels (O-6s) who now qualify for EITC and child tax credits.

Mullett and Raphael Tulino, IRS spokesman for southern California and Nevada, spent a few hours with Military Update reviewing 2005 tax highlights for service members. Later, Army Lt. Col. Jane Fenton, executive director of the Defense Department’s Armed Forces Tax Council, offered more insights.

The first thing military taxpayers should know, IRS officials said, is they don’t have to tackle tax returns on their own. Free help is available year round, on military bases stateside and overseas, through the IRS’ Volunteer Income Tax Assistance (VITA) program.

Staffed by IRS-trained volunteers using the latest tax-filing software, VITA is open to active duty, military retirees, reserve component members, service spouses and survivors. Tax returns filed electronically can generate refunds in seven to 10 days. That should encourage even cash-strapped families to avoid the fees of commercial tax services or the exorbitant fees charged for so-called Refund Anticipation Loans.

Military members now serving in combat areas don’t have to worry about 2005 tax returns on time. IRS tax actions are suspended until they leave combat areas, and then they will have six months to file. Even that deadline is extended automatically by the number of days a member served in a combat zone from Jan. 1 to April 15, the normal U.S. tax-filing period.

Even in peacetime, military personnel enjoy some tax breaks. That’s because a portion of military pay is provide as tax-free housing and food allowances, or “in kind” government housing and meals. On average, said Fenton, allowances represent roughly 25 percent of officer compensation and 33 percent of enlisted. The average value of tax breaks on those allowances, she said, is about $5,000 for officers and $2,500 for enlisted.

In a combat zone, all enlisted and warrant officer pays are non-taxable. Only the combat tax exclusion for commissioned officers is capped, for 2005 at $6,529 tax free a month. A member who serves even a day in a combat zone receives that month’s pay tax free. Likewise, all bonuses or special pays received are tax free, which encourages members to re-enlist or extend service obligations while serving in combat areas.

Combat tax breaks become even more valuable when combined with tax credits available to millions of other Americans.

Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: