Active duty members of the U.S. armed forces have special tax return filing considerations for both state and federal purposes. It is important to consider how a service member and his or her spouse's residency affects their tax liability, as well as where their income is earned. The Servicemembers Civil Relief Act (SCRA) provides certain protections for service members and their families. This act is not limited to taxes, but many of its provisions relate to taxes. Below are a few common examples.
A service member's residency is not based on where he or she is permanently stationed. Residency is based on the state the service member claims as a "home," typically the state where he or she enlisted. Confirmation of a resident state can be found on the military member's Leave and Earnings Statement.
A military spouse has the option to file either in his or her resident state or state of duty station. This choice becomes significant for community property valuation. Service members' spouses will not pay tax on any income earned while living in a nonresident state and, instead, will pay taxes to their resident state if they meet two requirements. The spouse of a service member must (1) be living in the nonresident state for the sole purpose of being with the service member, and (2) the service member must be stationed in the state subject to Permanent Change of Station orders (50 U.S.C. §571(c)). A practitioner should research the tax benefits offered by each state for which the client is filing, since benefits for active duty personnel are common, yet vary by state.
Service members have exceptions for when tax payments are due, as well as penalties and interest. If a service member's ability to pay an income tax liability is materially affected by his or her military service, tax is deferred up to 180 days after termination of service, without any accrual of interest or penalties for that period (50 U.S.C. §§570(a)—(b)).
For most tax situations, each spouse must sign the tax return or grant a power of attorney to someone to sign the return. There are exceptions for service members. However, merely being overseas does not grant a service member an exception to this rule. A deployed spouse will need to sign the return early or fill out a Form 2848, Power of Attorney and Declaration of Representative. However, if a service member is deployed to a combat zone, a power of attorney is not needed to sign the return on the deployed spouse's behalf. The other spouse must attach to the return a signed statement explaining the combat zone status. If a service member deployed to a combat zone is deemed missing in action, a joint return can be filed under the same rules for up to two years after the termination of the combat zone designation of the deployment location. The joint return will be considered valid even if it is later determined that the missing spouse died before the year covered by the return.
If a service member cannot sign a return due to disease or injury but can verbally authorize the return, then the spouse can sign for the service member. The spouse should also attach a signed, dated statement with the return that explains why the service member could not sign the return and that he or she agreed to have the spouse sign it.
Preparing active duty service member tax returns requires advance consideration of specific tax issues. Understanding these situations allows practitioners to better serve military clients and create better tax planning opportunities.
For a detailed discussion of the issues in this area, see "Tax Considerations for Active Duty Military," by Hannah Bigej, CPA, in the December 2016 issue of The Tax Adviser.
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
Also in the December issue:
- An update on foreign financial account reporting.
- An analysis of qualified domestic trusts and portability.
- A discussion of tax planning for aging clients.
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