Mastering military tax planning – a guide to helping your clients

If any of your clients work in the military, it’s essential for you to be aware of all of the unique financial circumstances that may affect them. Military life, marked by frequent relocations and complex benefit structures, can lead to potential tax advantages being overlooked or unexpected liabilities.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: If a veteran’s disability compensation is rated at 100%, is it not taxable? What if it’s rated at 20%?

A: Generally, if the compensation is due to a disability rating, it is not taxable and not included on Form W-2, Wage and Tax Statement.

Q: Can special incentive pay, while taxable, qualify as combat zone pay to be excluded, or does the government distinguish these differently on purpose, thus not allowing them to overlap?

A: If those services were performed in a combat zone, technically they can be excluded. While Reg. §1.112-1 does not have an example specifically related to incentive pay, whether the pay can be excluded is dependent on whether the services were performed in a combat zone.

Q: If combat pay is included when calculating the earned income credit (EIC), is it taxable? Can you exclude part of the pay? If so, how do you verify this information?

A: No, it’s just an election to include for EIC purposes only. It’s an all-or-nothing election. Typically, the combat pay is on a Form W-2, Wage and Tax Statement, Box 12, Code Q. You should be able to rely on that information.

Q: Do travel expenses include temporary lodging and looking for a place to stay?

A: No. It appears those costs are not deductible. In order to be a deductible moving expense, it must relate to traveling to the new location or transporting the service member’s household goods. Those temporary costs do not appear to be deductible.