(Active-duty members, reservists, veterans, and families)
1) Active-duty members: relocations, allowances, and state residency
Permanent Change of Station (PCS) moves. For tax years after 2017, the moving-expense deduction is suspended for most taxpayers—but active-duty service members moving under military orders and a PCS may still deduct unreimbursed moving expenses for themselves, a spouse, and dependents. Qualifying moves include costs like transportation and storage; claim them as an “adjustment to income.”
Allowances and combat pay. Most military allowances—notably Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS)—are excluded from federal income. (Certain allowances, like CONUS COLA, are taxable.) Combat pay is generally excluded from income under the Combat Zone Tax Exclusion (CZTE), subject to officer limits.
Home sale while on orders. The §121 exclusion ($250,000 single/$500,000 MFJ) normally requires that you owned and used the home as a principal residence for 2 of the 5 years before sale. Qualified extended duty allows military taxpayers to suspend the 5-year lookback for up to 10 years, effectively giving a much longer window to meet the 2-year tests. See Pub. 523 for mechanics and examples.
State of legal residence / domicile (with spouse rules). Under the Servicemembers Civil Relief Act (SCRA) and the Military Spouses Residency Relief Act (MSRRA)—as expanded by the Veterans Benefits and Transition Act of 2018—a servicemember generally does not acquire or lose domicile for tax purposes just by moving on orders. The spouse may elect to use the servicemember’s state of residence for income-tax purposes even when living elsewhere solely to accompany the member. States implement this via specific withholding forms and procedures.
Filing/payment extensions while deployed. Service in a combat zone or contingency operation automatically extends filing and payment deadlines: the period of service plus 180 days, plus any days remaining in the normal filing window when you entered the zone. Members on duty outside the U.S. (not in a combat zone) generally receive an automatic two-month filing extension (interest may still accrue on unpaid balances).
Planning pointers.
- Track reimbursed vs. unreimbursed PCS costs and keep orders.
- Confirm your state withholding aligns with SCRA/MSRRA elections; update employer/state forms as needed. Department of Revenue
- If selling a home because of orders, evaluate the §121 suspension early.
2) Reservists: balancing civilian and military income
Above-the-line travel deduction. Armed Forces reservists can deduct unreimbursed travel expenses (mileage, lodging, meals subject to federal rates) incurred >100 miles from home for reserve duty that requires an overnight stay—even though unreimbursed employee expenses are otherwise suspended. The deduction flows via Form 2106 to Schedule 1.
Differential wage payments. If a civilian employer pays “differential wages” while you’re on active duty >30 days, those payments are subject to federal income-tax withholding but not subject to FICA/FUTA under IRS guidance. Plan cash flow and withholding accordingly.
Earned Income Tax Credit (EITC) considerations. Members with nontaxable combat pay can elect to include that amount as “earned income” solely for EITC purposes—an all-or-nothing election that can increase or decrease the credit depending on circumstances. Since 2024 the election is reported on Form 1040 line 1i. Model the result both ways.
Coordination tips.
- Keep meticulous records of reserve-related miles, dates, orders, and per diem rates to substantiate the above-the-line deduction.
- Check W-2 treatment of differential wages and adjust quarterly estimates if needed.
3) Veterans: unique exclusions, credits, and interactions
VA benefits and disability payments. VA disability compensation, disability pension, grants for adapted housing, and VA education benefits (e.g., GI Bill) are not taxable. Disability severance payments related to combat injuries have special relief; affected veterans could claim refunds if previously taxed (subject to deadlines). CRSC (Combat-Related Special Compensation) is generally non-taxable, while CRDP (Concurrent Retirement and Disability Pay) is taxable. (Confirm current DFAS/IRS characterization on individual accounts.)
State benefits. Many states provide partial or full exclusions for military retirement pay or property-tax relief for disabled veterans—these are state-specific; verify your state’s current rules annually.
Adoption assistance and credit. DoD may reimburse up to $2,000 per child ($5,000 per year) for qualified adoption expenses; separately, the federal adoption credit (and employer-provided adoption assistance exclusion) applies. For the 2025 tax year, the federal adoption tax credit will be partially refundable for the first time, allowing qualifying families to receive up to $5,000 as a refund.
. The maximum credit amount for qualified expenses has also increased to $17,280 per child. Coordinate reimbursements and credits to maximize benefit.
Education and employment incentives. While not a veteran credit per se, employers hiring certain veterans may claim the Work Opportunity Tax Credit (WOTC); veterans who start businesses should also review federal disability-access and small-business incentives where applicable (fact-specific).
Home sale rules post-service. If you sell a former principal residence after service, remember that the §121 military suspension may still be applicable if you were on qualified extended duty during ownership.
4) Families: leveraging extensions, allowances, and family-focused benefits
Automatic time relief. Spouses often receive the same combat-zone extensions as the deployed member for filing and paying federal taxes. Keep deployment orders and note the start/stop dates to compute the extension period (service + 180 days + leftover filing-season days).
Child & dependent care. Deployment and irregular schedules can prompt families to consider the Child and Dependent Care Credit or employer-provided dependent care assistance (excludable up to the statutory cap). Compare the credit vs. exclusion based on AGI. (If stationed OCONUS, consider availability and qualifying-person rules.)
Education benefits. VA education benefits for dependents are generally non-taxable. Coordinate with American Opportunity or Lifetime Learning credits only when expenses are out-of-pocket and not already covered by tax-free aid.
Adoption. Combine DoD reimbursement with the federal adoption credit/exclusion for maximum net benefit; track timing and qualified expenses carefully.
Housing and cash-flow. Because BAH/BAS are tax-free, effective marginal tax rates are lower than gross cash suggests; use that to calibrate withholding and estimated payments. (You can still deduct mortgage interest and property taxes even if paid with BAH.)
Withholding and state residency for spouses. If a spouse elects the member’s domicile under MSRRA/VBTA, update employer state-withholding forms to prevent incorrect state tax. Keep proof of eligibility (orders, marriage documentation, domicile evidence).
Quick checklists & tactics
Active-duty PCS move
- Orders + receipts; separate reimbursed vs. unreimbursed.
- Pub. 521/Topic 455 rules; claim on Schedule 1.
Reservist weekend/annual training
- If >100 miles & overnight: mileage, lodging, M&IE per diem → Form 2106 → Schedule 1.
- If mobilized: review differential wages and adjust withholding.
Combat-zone deployment
- Mark entry/exit dates; compute service + 180 days + leftover filing days.
- Consider EITC combat-pay election modeling for both member and spouse.
Selling a home
- Evaluate §121 suspension for extended duty; document assignments.
State taxes for families
- Apply MSRRA/VBTA if eligible; update employer forms (and stop incorrect state withholding).
Sources you can rely on (and revisit annually)
- IRS Publication 3, Armed Forces’ Tax Guide (updated each filing season): reservist travel deduction; combat-zone rules; reporting elections.
- IRS Topic 455 and International Taxpayers Moving-Expenses page: active-duty PCS deduction basics.
- IRS Pub. 523 & Topic 701: §121 home-sale exclusion including military suspension.
- IRS combat-zone deadline pages and annual extension news releases.
- Military OneSource: plain-English explanations of MSRRA/VBTA residency rules and adoption/tax resources; always reconcile with IRS/state instructions.
Final note
Rules affecting military households are stable in concept but procedurally updated every year (form lines, thresholds, and per-diem rates). Before filing, confirm the current year’s IRS Pub. 3, Pub. 523, and your state’s guidance on MSRRA/VBTA implementation.