Military Specific Impacts of Tax Reform
Now that the Trump administration has passed tax reform, let’s take a look at some of the military specific aspects of it…
Deducting Moving Expenses
While civilians lost the ability to deduct moving expenses, the tax reform bill kept this deduction intact for military movers. You can still deduct qualifying moving expenses that weren’t reimbursed by the government.
You can’t deduct any expenses that were reimbursed by a non-taxable allowance (like dislocation allowance or DLA). You also can’t deduct expenses for sightseeing trips or visiting family members along the way.
Loss of Travel Expense Deduction for Guard/Reserve Members
After 2017, members of the Guard and Reserve who travel less than 100 miles from home to military duty will no longer be able to deduct any unreimbursed travel expenses. Tax reform suspended all miscellaneous itemized deductions, which included the itemized deduction reserve-component members could take for unreimbursed employee expenses on Schedule A of their Internal Revenue Service Form 1040.
Those who drill more than 100 miles from home still can deduct their unreimbursed expenses as an above-the-line adjustment to their gross income.
Loss of the State and Local Tax Deduction
Another change in the tax law reduces the amount of state and local taxes that can be deducted from your federal taxes, limiting the amount that can be deducted to $10,000. For some high earners, that limited deduction could mean they pay more in federal taxes.
Because most military members don’t earn high enough salaries, this is unlikely to affect active duty members. Civilians who are members of the Guard or Reserves, though, could be affected in addition to high earning senior officers who receive special bonuses like dentists, doctors, etc.
Serve in the Sinai Peninsula?
Military members serving in the Sinai Peninsula now qualify for the combat tax exclusion. Anyone who served there going back to June 9, 2015 is now eligible to claim the tax exclusion during the time they served there.
Anyone affected should receive IRS Form W-2C showing they qualify for the combat tax exclusion, which will allow them to file an amended tax return to get refunds for those years.
Improper Taxation of Disability Severance Pay
Any service member who suffers a combat-related injury and is separated from the military receives a one-time, lump-sum disability severance payment based on their rank and years of service. Although the payout was supposed to be tax-free, the Department of Defense (DoD) routinely took taxes out of the severance pay.
Under the 2016 Combat Injured Veterans Tax Fairness Act that went into effect in 2017, DoD was required to identify the 133,000 veterans whose benefits were previously improperly taxed dating all the way back to 1991. The notification letter will include information about the amount that was improperly taxed, and instructions for filing an amended tax return to get the refund.
Tax Resource for Military Members
The IRS has a special page for military members that is a great resource. In addition, the Military Officers Association of America has a 55 minute webinar that explains the impact of tax changes on military members as well as a good summary article of the general changes.