Everyone has to pay taxes, even military service members. If your spouse is in the U.S. military, you’re left with the challenging job of raising a family and handling domestic affairs. You have to live by different rules, and even something as straightforward as filing taxes can get confusing.
Fortunately, there are a few things you can do to reduce your tax burden. Understanding and following the following strategies below may simplify your tax situation and help you reduce your tax liability. Let’s get started.
What’s taxable, what’s not
Your spouse’s military income can be broken down into different categories. Knowing these categories will help you understand which ones are taxable and which ones are tax-free.
The bulk of their income will come from their Basic Military Pay, or “base pay.” The base pay is standardized and depends on your spouse’s rank and length of service. The federal government taxes the base pay unless your spouse is serving in a tax-free combat zone. You may also be liable for state taxes. Some states waive the income tax altogether, while others only tax in-state military income (i.e. your spouse’s duty station).
Other special allowances such as clothing allowance, Basic Allowance for Housing (BAH), Cost-of-Living Allowance (COLA), Basic Allowance for Subsistence (BAS), and Overseas Housing Allowance (OHA) are non-taxable.
Know your filing status
For federal tax purposes, marriages of same-sex and opposite-sex couples are treated the same. Regardless of sex, the term “spouse” only applies to legally married couples.
If you are married, you have the option to file jointly or separately on your federal income tax returns. The Internal Revenue Service recommends that married couples file a joint return, but there may be a few instances when it’s better to submit separate returns. However, filing separately could also make you ineligible for certain tax breaks.
If you’re in a civil union, registered domestic partnership, or other similar legal arrangements that aren’t considered married for federal tax purposes, you must select single as your filing status. You can still file a return on behalf of a military service member.
Understand residency rules
When civilians move to a new state, they become a resident of that state and file taxes using that state’s tax laws. However, military service members and their spouses fall under different rules.
If you’re wondering how to file state taxes for military spouses, you need to understand the Military Spouses Residence Relief Act (MSRRA). The MSRRA simplified tax rules for military families, especially when it comes to military spouse income taxes and tax returns.
According to MSRRA, you don’t have to pay state income taxes if:
- You live in a state different from your state of legal residence (SLR) or legal domicile.
- You’re in the state solely to live with the service member.
- The service member is assigned to the state in compliance with military orders.
If you meet these conditions, your income won’t be taxed by the duty station state. You still need to pay income and property taxes in your state of legal residence, however. If your legal domicile is Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming, you don’t have to pay state income tax.
How to further reduce your tax liability
If you and your service member spouse have different legal domiciles, you can take advantage of a new law to maximize your military spouse’s tax exemption. The Veterans Benefits and Transition Act of 2018 (VBTA) allows military spouses to choose the state of legal residence of their service member for tax purposes.
Best of all, the spouse doesn’t have to live or even establish intent to move to the service member’s state of legal residence. For instance, the spouse of a Texas-domiciled service member can claim residency in Texas, which has no state income tax and virtually eliminate their state tax liability.
The VBTA applies retroactively to tax year 2018, and if you paid state taxes that year, you might be eligible for a tax refund.
Hire the right people
A single mistake on your tax returns can lead to headaches and legal troubles down the line. The best way to reduce your tax liability and save money is to hire a tax professional to handle your finances. Make sure to look for an enrolled agent who understands the intricacies of the military lifestyle. At TFX we’ve been handling taxes for over 25 years now and we’re here to help you.