The United States Armed Forces includes enlisted personnel and officers in regular and reserve units in the Secretaries of Defense (Army, Navy and Air Force) and the Coast Guard. The American Red Cross and U.S. Merchant Marines are not part of this law, although employees may receive other exemptions if they serve in a combat zone. If you are unsure what tax exemptions you or your family are eligible for, consult a lawyer or contact the Internal Revenue Office for advice.
Combat Zone Pay
According to the Internal Revenue Code, servicemen working in combat zones do not have to pay taxes on their pay. Prior to 2006, servicemen were experiencing difficulties as this tax code meant servicemen’s taxable income was not sufficient to allow them to add contributions to their retirement accounts. However, in May 2006, the Heroes Earned Retirement Opportunities Act, otherwise known as the Heroes Act, amended this code, allowing servicemen to include combat zone pay as part of their income tax deduction for contributions to retirement savings plans.
According to the Military Family Tax Relief Act of 2003, survivors of deceased service officers receive a tax-exempt allowance of $12,000. Prior to 2003, only $6,000 of this was tax free, the remainder was taxable. To receive these allowances families need to fill in Form 1040X stating the reason for the tax exemption.
Sale of Residence
A taxpayer on extended duty in the armed or foreign service can suspend the running of the five-year ownership and use period before the sale of a residence. This exemption applies when the serviceman is residing in government housing for more than 90 days or if they are living more than 50 miles from their residence. This relief can only be claimed for one property at a time.
Typically, 10 percent tax is levied from payments for a Qualified Tuition Program or Coverdell Education Savings Account (if the account is not used for educational purposes). After 2002, members of the U.S. Military Service do not have to pay this tax. This is on the premise that the payments do not exceed the cost of providing advanced education.