Tax Returns for Active Military Personnel

August 12, 2013

In addition to all of the regular tax credits and exemptions that are available for ordinary U.S. taxpayers, military personnel are entitled to a number of special benefits that apply solely to them. Many people are not aware of these benefits, so it’s important to become familiar with them in order to get every tax break to which you may be entitled.

The California Franchise Tax Board (FTB) has outlined some of these benefits in a document on its website.

A young American solider standing in front of the star-spangled banner.

Dates for Filing and Extensions

Military personnel and members of the Merchant Marines who are out of the country are automatically qualified for extensions for filing and paying taxes, for contributing to an IRA, for claiming refunds or credits, and for filing protests or appeals.  They also apply for certain other situations such as those who are deployed in a combat zone, or qualified hospitalization.

These extensions apply to federal as well as California state returns, and may extend your filing deadline to as much as 180 days after you have returned from a combat zone.

The Military Spouses Residence Relief Act

The MSRRA, passed in 2009, helps clarify a military member and spouse’s residency status for state tax purposes. The military member can establish a state of residency which does not change due to deployment or re-station. The spouse can then choose either the member’s chosen state, or his current state of residency, for tax purposes. This can be extremely beneficial if one of the states has a low, or no, income tax rate.

Essentially, what this means is that the military member’s state of residence does not change with any change in station, and that the spouse can change residence or not, depending on which results in the more favorable tax treatment.

Child and Dependent Care Expenses Credit (CDC)

Military personnel who are stationed outside of California may use their modified AGI (Adjusted Gross Income less military pay) in order to calculate the CDC credit.  When using this modified AGI figure in your calculation, you must write “MPA” to the left of the credit amount on line 12 of Form FTB 3506, the CDC worksheet.

Note, however, that the FTB system is not prepared to handle this calculation properly. It will generate a “Return Information Notice” (RIN) and attempt to correct the credit to the calculation that uses the AGI that you reported on your federal return, rather than the modified AGI that was calculated on your California return. You will need to contact the FTB in order to resolve this discrepancy, according to the directions on the RIN when you receive it. The FTB is aware of this problem, but has not yet developed an automated fix for the situation.

Reserve Travel Expenses

Members of the National Guard and the armed forces Reserve who attend Guard and Reserve meetings for which they must travel more than 100 miles and stay overnight are entitled to a deduction for expenses for meals, travel and lodging. These expenses must be unreimbursed, and are taken as an above-the-line deduction from AGI.

Soliders standing in al ine with an American flag on the ground.Small Business Owners

Military personnel who are sole owners of a Limited Liability Company (LLC) or a corporation are not subject to the minimum franchise or annual tax if they are deployed at any time during the tax year, and if the business suffers a loss or ceases operation.

Owners must write “Deployed Military” in red ink at the top margin of the business’s tax return when it is filed, in order to indicate that the business is exempt.

Tax Break When Selling A Home

Generally there are residency requirements that must be satisfied before a homeowner is entitled to take the exemption for capital gains that occur when selling a home; in order to get the $250,000 ($500,000 for married couples) exemption, the property must have been your primary residence for at least two of the five years prior to the sale.

For military personnel, tax law recognizes that they tend to be away from a primary residence more frequently than do civilians. Military personnel are allowed to suspend the 2-of-5-years test for up to 10 years when on extended duty that takes them away from their home.

Complicated Benefits

Many of the benefits that are extended to military personnel can be complicated and can contain a lot of qualifications– so be sure to consult a tax professional who is familiar with military-specific requirements when you are ready to file.