Special tax and financial benefits just for the military

As America recognizes Veteran's Day in a few weeks, it's an excellent time to thank those who have served and are currently serving our country in the armed forces.

One way the country shows that appreciation are financial and tax benefits that are available only to veterans and active-duty military members. Here are a few, and more can be found at the Veterans Benefit Administration.

Members of the military and veterans with qualifying service have access to VA home loans, which can offer mortgages with advantages that aren't available to borrowers who use conventional loans. VA mortgages have several unique features specifically designed to help vets and eligible borrowers. Most notable is that a qualifying individual can obtain a mortgage with no down payment and no private mortgage insurance (PMI.) That's in contrast to conventional loans that require expensive PMI for borrowers who don't put down at least 20 percent. 

Other features of a VA loan include limited closing costs, no penalty for early repayment and the ability to transfer the loan, which can help you sell the house down the road.

Sometimes veterans' pay can be tax-free. For example, disabled vets may be eligible to claim a federal tax refund on the disability pay or Combat Related Special Compensation they receive from the Department of Veterans Affairs. To claim the federal tax refund, a disabled vet needs to file an amended tax return, Form 1040X, to correct the tax return previously filed that included the special pay.   

Also, veterans' disability benefits from the VA are tax-free and shouldn't be included in gross income. This includes several payments, including disability compensation and pension payments for disabilities paid to veterans and their families. 

Other forms of disability-related payments are tax-free, such as grants for home modifications designed for wheelchair living, special motor vehicle modifications for veterans who've lost the use of their limbs and benefits for dependent care assistance.

Under the Combat Injured Veterans Tax Fairness Act, which went into effect in 2017, veterans who suffer combat injuries and are separated from the military aren't taxed on the one-time lump-sum disability severance payment they receive. The law requires the Department of Defense to contact any veterans who were taxed on these payments to help them file amended tax returns and claim a refund.

Free financial coaching is available to veterans through a special program offered through the Consumer Financial Protection Bureau, Office of Servicemember Affairs. The Financial Coaching Initiative, managed through the Armed Forces Services Corporation (AFSC), is designed to help veterans with their financial goals and provides personalized financial support services.  

Several unique tax deductions are available to members of the military, which are outlined in in Publication 3 - Armed Forces' Tax Guide. Some of these include:

  • Moving expenses: Unreimbursed expenses that exceed moving allowances may be deductible for those on active duty. If the move is because of a permanent change of station and the expenses are unreimbursed, use Form 3903 to figure the amounts that you can claim. Under the new tax law, this deduction was eliminated for civilians, but it remains for active-duty military.  
  • Duty-related travel expenses: Reservists who incur expenses to travel to reserve-related duties more than 100 miles from their home can deduct their unreimbursed travel expenses. You can claim this on Form 2106, or Form 2106-EZ, even if you don't itemize deductions.
  • Uniform expenses: When regulations prohibit you from wearing certain uniforms off-duty, the costs of these items can be deductible. Example include dress and utility uniforms that you can't off-duty and articles such as insignia of rank, epaulets, and swords.

Active-duty military receive many types of pay, including basic pay, special pay, combat zone or hazardous-duty pay and allowances for living, moving and travel. Some of these are included in their taxable income, but other types of pay are excluded and therefore not taxed. Here are a few types of pay that are typically provided in the form of an additional allowances and excluded from taxable income:

  • Combat zone pay: Pay while actively serving in a designated combat zone or hazardous duty area is fully excluded for enlisted members, and a limited amount is tax-free for officers. Note that while this pay is exempt from taxable income, it does count toward figuring the income limits for contributions and deductions for IRAs.
  • Family allowances: Specific allowances paid for educational expenses of dependents, evacuation and separation costs are also received tax-free.
  • Living allowances: Basic Allowance for Housing, or BAH, is tax-free. And even if you use your BAH to pay for a house you own, you can still take a deduction for mortgage interest and real estate taxes. Pay received for Basic Allowance for Subsistence (BAS) and Overseas Housing Allowance (OHA) is also tax free.
  • Death allowances: Amounts received for burial services, payments to survivors and travel of dependents to a burial site is excluded from taxable income.
  • Moving allowances: Reimbursements for moving expenses related to being dislocated, base reassignment, temporary lodging and the expenses related to moving and storage of personal and household affects are exempt from taxable income.

Finally, if a member of the armed forces is killed while in active duty in a combat zone or dies from wounds received during a military or terrorist action, the deceased individual's tax liability in the year of death, or even in prior years (during the period of active duty combat service), can be forgiven. The forgiven tax will never have to be paid. 

Survivors filing a return for a deceased service member should write the name of the military action and KIA, such as "Desert Storm – KIA" or "KITA" (if killed in a terrorist action), in bold letters at the top of the tax return. When the IRS receives the return, it will help to determine the amount of the tax to be forgiven, or if already paid, to be refunded.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.