Article Highlights:Service Member and Spouse Residence or DomicileNon-Taxable AllowancesCombat Zone ExclusionHome Mortgage Interest DeductionHome Property Tax DeductionHome Sale Gain ExclusionMoving DeductionDeath Gratuity PaymentsChild CreditEarned Income Tax CreditIRA ContributionsReservist’s Travel ExpensesQualified Reservist’s Early Retirement Plan WithdrawalsRetired Military Disability CompensationExtension of DeadlinesJoint ReturnsTax ForgivenessROTC StudentsMilitary members benefit from a variety of special tax benefits. These include certain non-taxable allowances, non-taxable combat pay, and a variety of other special tax provisions. Here is a rundown on the most prominent of the tax benefits.Service Member and Spouse Residence or Domicile - A frequent question by service members is “What is my state of residence for tax purposes?” since one’s duty station may change multiple times while serving. Until recently the Servicemembers Civil Relief Act of 2003 allowed a service member to continue to retain his or her home state of residence for tax purposes, even when required to move to another state under military orders. This also applies to other tax jurisdictions within a state, such as for city, county, and personal property taxes. Thus, a service member was able to file tax returns for his or her home state and not the state where he or she is stationed.Then Sec 302 of Veterans Benefits and Transaction Act of 2018 permitted the spouse of a servicemember to elect the same residence for purposes of taxation as the servicemember regardless of the date on which the marriage of the spouse and the servicemember occurred. The election applied with respect to any return of State or local income tax filed for any taxable year beginning with 2018. The benefit of this election is that a spouse of a servicemember stationed in a high-income tax state can elect the state of residency of the servicemember whose resident state has no or low state income tax and not be subject to the state taxes where his or her spouse is stationed.More recently, Congress passed the Veterans Auto and Education Improvement Act of 2022. Under this legislation, which became law Jan. 5, 2023, servicemembers and their spouses, regardless of the date on which the marriage of the servicemember and the spouse occurred, are allowed to elect the state in which they pay income taxes from three options, the:Legal residence or domicile of the servicemember.Legal residence or domicile of the spouse, orCurrent permanent duty station of the servicemember.The Act also expands to spouses a residency protection already offered to servicemembers that allows them to remain tied to a former legal residency, even if they are no longer physically live there.Non-Taxable Allowances – Members of the military benefit from a number of non-taxable allowances including:Living allowances - Basic allowance for housing (BAH), housing and cost-of-living allowances abroad whether paid by the U.S. Government or by a foreign government and overseas housing allowance.Family allowances - Certain educational expenses for dependents, emergencies, evacuation to a place of safety and separation.Death allowances - Burial services, death gratuity payments to eligible survivors, and travel of dependents to burial sites.Moving allowances – Including for relocation, move-in housing, moving household and personal items, moving trailers or mobile homes, storage, temporary lodging and temporary lodging expenses, and military base realignment and closure benefits.Travel allowances – Including annual round trips for dependent students, leave between consecutive overseas tours, reassignment in a dependent-restricted status, transportation for military taxpayers and dependents during ship overhaul or inactivation, and per diem.State benefit payments – Any bonus payment made by a state or political subdivision to any member or former member of the U.S. uniformed services, or to his or her dependent, only because of the member's service in a “combat zone,” is generally treated as a “qualified military benefit” excludable from gross income.Other payments – Defense counseling, disability (including payments received for injuries incurred as a direct result of a terrorist or military action), group term life insurance, professional education, ROTC educational and subsistence allowances, survivor and retirement protection plan premiums, uniform allowances, and uniforms furnished to enlisted personnel.In-kind military benefits – Including legal assistance benefits, space-available travel on government aircraft, medical/dental care, and commissary/exchange discounts.Combat Zone Exclusion –A member of the U.S. Armed Forces who serves in a combat zone can exclude certain pay from income. This pay includes active duty pay earned in any month served in a combat zone; imminent danger/hostile fire pay; a reenlistment bonus, if the voluntary extension or reenlistment occurs during a month served in a combat zone; accrued leave pay earned in any month served in a combat zone; awards for suggestions, inventions, or scientific achievements the service member is entitled to because of a submission made in a month served in a combat zone; and student loan repayments attributable to the period of service in a combat zone (provided a full year’s service is performed to earn the repayment).Any part of a month in a combat zone counts as an entire month. Periods when a servicemember is hospitalized as the result of wounds, disease, or injury in a combat zone are also excluded, provided the hospitalization begins within 2 years of combat zone activities. The hospitalization need not be in the combat zone. Generally, the excludable combat pay is not included in the individual’s pay reported on Form W-2.Commissioned Officers – Commissioned officers may exclude their combat-zone pay; however, the amount of their exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay received).Home Mortgage Interest Deduction – Military taxpayers who receive a non-taxable housing allowance and also own a home can deduct the mortgage interest on their home as an itemized deduction, even if they are paid with the non-taxable military housing allowance pay. However, the home mortgage interest is still subject to the general rules for deducting home mortgage interest, meaning through 2025, only home acquisition debt interest is deductible. Home acquisition debt is debt used to acquire, build, or substantially improve a home.Home Property Tax Deduction – Even though they receive a non-taxable housing allowance, a military taxpayer can still deduct their home’s property taxes as an itemized deduction. However, the deduction for real property tax and state/local income or sales tax is limited to $10,000 annually for years 2018 through 2025.