The following are details on common withholdings and tax issues for service members.
Service members can request automatic withholdings to buy U.S. Savings Bonds, make bank deposits or pay car loans, mortgages or other debts. These can be arranged through base disbursing offices.
Earned Income Tax Credit
The EITC helps offset Social Security and Medicare contributions from the lowest-income wage earners. The size of the credit and qualifying income thresholds change each year.
Lower-ranking and midlevel military parents may qualify for this tax credit, and even singles who spend most of a year in combat deployments could qualify.
For tax year 2009, the credit is worth up to $5,657 for low-income parents and guardians with three or more qualifying children; up to $5,028 for those with two qualifying children; up to $3,043 for those with one qualifying child; and up to $457 for those with no qualifying children.
Because most service members do not pay taxes on their income while deployed in combat zones, their taxable income may be low enough for a given tax year to qualify them for this credit.
However, taxpayers must have a certain minimum level of taxable income to qualify for the EITC. Service members who spend most or all of a tax year deployed in a combat zone — and thus have little or no taxable income — may fall below these thresholds. A change to tax law made several years ago allows service members to treat tax-free pay earned in a combat zone as taxable income solely for the purpose of qualifying for the Earned Income Tax Credit.
The IRS Web site has a page devoted specifically to EITC information for service members, at www.irs.gov/newsroom/article/0,,id=97273,00.html.
Service members apply for the credit by filing an IRS Form W-5 with the Defense Finance and Accounting Service.
Federal Income Tax
Service members pay federal income tax on basic pay, bonuses and most special pays, and they also pay state income taxes. Military allowances, including housing and food allowances, are tax-exempt.
When members receive taxable pay, the military generally withholds the proper amount automatically from their paychecks.
Legal assistance offices can provide details on taxes, and base disbursing offices have details on what pay is taxable.
Service members may realize tax benefits in these ways:
Military personnel who serve in a combat zone or hazardous duty area earn certain tax exemptions. These areas are:
• Afghanistan, designated a combat zone effective Sept. 19, 2001. The combat zone includes all of Afghanistan and the airspace above it. In addition, many service members serving in areas certified by the secretary of defense as directly supporting operations in Afghanistan qualify for combat-zone tax status if they also are drawing imminent danger or hostile fire pay in connection with their duties. These include Kyrgyzstan, Pakistan, Tajikistan, Uzbekistan, Jordan, Yemen, Djibouti and troops on Operation Enduring Freedom orders in the Philippines.
• The Balkans, designated a combat zone on March 24, 1999. The combat zone includes Serbia, Montenegro, Kosovo, Albania, the Adriatic Sea and the Ionian Sea north of the 39th Parallel.
• Iraq and the Persian Gulf region, designated a combat zone Jan. 17, 1991. The zone includes Saudi Arabia, Kuwait, Iraq, Oman, Bahrain, Qatar and the United Arab Emirates. It also includes the Persian Gulf, Red Sea, Gulf of Aden and a portion of the Arabian Sea.
Pay received by enlisted personnel and warrant officers serving in the zones after the specified dates are exempt from federal tax. Most states provide similar exemptions.
Commissioned officers do not receive a full tax exemption; their exclusion is limited to the highest monthly rate of enlisted pay, plus their $225 monthly imminent-danger pay. For 2008, this means officers must pay income taxes on any monthly pay above $7,143.30, the rate paid to the military services' senior enlisted advisers, plus $225, a total of $7,368.30.
Generally, this affects only O-5s and above.
Bonuses earned in combat zones also are not taxed. Service members who re-enlist in Kuwait, for example, do not have federal taxes deducted from their re-enlistment bonus or subsequent installments received after returning home.
In some circumstances, tax exemptions extend past the time spent in theater. Personnel hospitalized with wounds, disease or injuries sustained while serving in a combat zone are not subject to tax on their military pay for up to two years after the area is no longer considered a combat zone.
Servicemembers' Civil Relief Act
This law prevents states from taxing service members in the situations listed below:
• Service members do not have to pay personal property taxes, except to their state of legal residence. This applies only to property that is titled solely in the member's name.
Property owned jointly by a service member and a civilian is subject to taxes. Service members are subject to local taxes on real property such as homes.
• Only one state can collect income taxes from military personnel — the state of legal residence. That does not have to be the state in which the service member is stationed.
Military family members are not covered by this law. They can be taxed by more than one state on personal property, for example.
Up to 25 percent of a service member's paycheck can be attached by private creditors to pay overdue debts incurred while on active duty. Creditors can lay claim to bank accounts or personal property. To take part of a service member's pay, a creditor must have a court judgment and pay all processing costs.
Military exchanges can claim up to 67 percent of service members' pay for debts owed. Exchanges must notify customers when accounts are overdue and make other efforts to contact delinquent customers. After 90 days, they may submit requests for involuntary pay deductions.
Basic pay, enlistment and re-enlistment bonuses, incentive pay and pay for reservists on active duty for more than 30 days can be attached. Exempt are housing and subsistence allowances and retired and separation pay.
In four states — North Carolina, South Carolina, Texas and Pennsylvania — pay cannot be seized to satisfy bad debts.
The Defense Finance and Accounting Service must give members at least 30 days' notice before reducing paychecks. The process may be delayed if a member is deployed, assigned overseas or hospitalized.
A service member can avoid the deduction if he or she proves the debt has been paid, the creditor's claim is false or illegal, or there is a legal obstacle to collecting the money.
Service members who have filed for bankruptcy may also be protected.
Military financial and legal counselors can help service members negotiate with creditors to manage their debt. Members can use the Consumer Credit Counseling Service to work out repayment plans.
Contact: The National Foundation for Credit Counseling, 800-388-2227; www.nfcc.org
Life insurance premiums are automatically deducted from pay. You must submit a written request to refuse coverage or choose partial coverage.
Service members pay Social Security and Medicare taxes. The tax is 7.65 percent of basic pay for those earning up to $102,000 per year. On earnings above $102,000 per year, service members pay only the Medicare portion of the tax, 1.45 percent.