Watch for military tax rules affecting your clients’ returns

Military tax returns can present issues that do not appear on a typical individual income tax return. Combat pay, military allowances, frequent moves, state residency questions and special filing deadlines can all affect how a return is prepared. Understanding these military tax rules can help prevent reporting errors and uncover tax benefits that might otherwise be missed.

Which military income is taxable?

Military compensation can include taxable income, nontaxable benefits and certain nontaxable allowances, making proper classification an important part of military tax return preparation.

Combat pay, housing and travel allowances are among the items that may require additional attention. Tax professionals need to understand what the client received, why it was received and how military status affects its tax treatment.

Filing deadlines can be affected

Service in a combat zone or contingency operation can postpone filing and payment deadlines; qualifying service outside a combat zone may do so as well. An assigned tour of duty outside the United States and Puerto Rico that includes the return's due date may qualify for an automatic two-month extension.

That means the standard filing timeline may not always apply to a military taxpayer or their family.

Frequent moves can cause state residency questions

A military client's current duty station does not necessarily provide all the information needed to address state residency considerations.

Active-duty service members and their families may move frequently because of military assignments. Income forms may have more than one state listed or be issued from a previous state. As a result, tax professionals will need to gather information about the client's circumstances rather than making a residency determination based only on where the service member currently lives or is stationed.

Check for tax benefits

Military status can affect eligibility for certain deductions, credits and other tax benefits.

Examples of military-related tax benefits that may warrant review include:

• Reservist travel expenses: A qualifying reservist may be able to deduct unreimbursed travel expenses when traveling more than 100 miles from home in connection with reserve service.
• Moving expenses: An active-duty member may be able to deduct qualifying unreimbursed moving expenses when the move is pursuant to military orders and incident to a permanent change of station. Qualifying expenses generally include transportation of household goods and travel, but not meals.
• Qualified reservist distributions: A reservist called to active duty for more than 179 days or an indefinite period may avoid the 10% additional tax on a qualifying IRA distribution or a distribution attributable to elective deferrals in a §401(k), §403(b) or similar plan. Check the distribution date and applicable repayment rules.
• Earned income tax credit: A taxpayer may elect to include all nontaxable combat pay as earned income when figuring the credit. Compare the credit with and without the election, because including that pay can increase or decrease it.

Eligibility depends on the type of service performed and the taxpayer's circumstances. Military status alone does not establish eligibility for each benefit.

Build your military tax knowledge with NATP

Military tax rules can add another layer of complexity to individual return preparation. Join Mari Fries, CFP®, EA, for NATP's upcoming Recognizing Special Tax Rules for Military Clients webinar on Nov. 3 and 4, 2026. The webinar is also available on demand after the live event.

You'll learn to distinguish taxable compensation from nontaxable benefits and allowances, apply special filing rules and spot potential tax benefits for military clients.