Military families face unique challenges with frequent relocations, but a special federal law offers a way to save on taxes. Under the Servicemembers Civil Relief Act, service members can maintain their “state of legal residence” for state income tax purposes, no matter where they are stationed. This can lead to significant financial benefits, as pointed out by Curtis Sheldon, a Certified Financial Planner and enrolled agent at C.L. Sheldon and Company in Alexandria, Virginia, which serves active and retired military members. Many military personnel choose states without an income tax, such as Florida, Texas, or Washington, to establish and maintain residency.
Another financial advantage for those in the armed forces comes in the form of tax-exempt allowances. According to Sheldon, while regular pay is taxable, allowances for essentials such as housing and food are generally not subject to income tax. These exemptions can considerably reduce a service member’s taxable income. Sheldon notes, “They don’t get reported anywhere on the tax return,” meaning military personnel must keep track of these items independently, as they won’t appear on a Form W-2.
Involved in combat zones? There’s more good news about potential tax savings. Income earned in designated combat zones is often exempt from federal income tax, a notable perk that can help reduce the financial burden on deployed service members. This exemption can lead to significant savings when filing taxes, acting as a financial cushion during and after deployment.
Moreover, military personnel can benefit from a special provision regarding the sale of a primary residence. Typically, homeowners may exclude $250,000 of capital gains for single filers or $500,000 for married couples, given that they meet the “use test” of living in the home for two of the past five years. However, for service members, the IRS offers a break from the five-year rule, allowing them to “stop the clock” during periods of qualified official extended duty. This exception means military members can still qualify for capital gains exclusions, even if they’ve been unable to meet the standard residency requirement. According to Sheldon, “You get to stop the clock,” providing flexibility when selling a home under these unique circumstances. It’s important to note, however, that this rule suspension is limited to a 10-year period.
For military families looking to maximize their savings and financial planning strategies, joining community resources and expert panels can be invaluable. On April 1, CNBC will host an exclusive virtual roundtable titled “Mission: Money Management,” in collaboration with The Association of Military Spouse Entrepreneurs. This event will offer insights on managing money effectively for those who serve. Participation is free, providing an opportunity for military families to learn from financial experts.
Navigating the complexities of military life requires access to sound financial advice and an understanding of the unique tax benefits available. By leveraging these special provisions, military families can potentially save thousands, making relocation and other challenges more manageable. Through proper knowledge and strategic planning, service members and their families can optimize their financial health.
Original Source: https://www.cnbc.com/2025/03/14/military-families-tax-breaks.html
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Publish Date: 2025-03-14 19:06:00
