Pay and Benefits
WITHHOLDINGS AND TAXES
Automatic withholding may be requested by military members on extended active duty.
Automatic deductions to buy U.S. Savings Bonds, make bank deposits or pay car loans, mortgages or other debts, for example, 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 changes 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.
The credit is worth several hundred to several thousand dollars, depending on the size of the applicant’s family.
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 website has a page devoted to EITC information at www.irs.gov/eitc.
Service members apply for the credit by filing an IRS Form W-5 with the Defense Finance and Accounting Service.
For tax year 2012, the IRS says the credit will be worth up to $5,891 for low-income parents and guardians with three or more qualifying children; up to $5,236 for those with two qualifying children; up to $3,169 for those with one qualifying child; and up to $475 for those with no qualifying children.
FEDERAL INCOME TAX
Reservists must pay federal income taxes on basic pay, bonuses and most special pays. Allowances generally are tax-exempt; reservists pay state income taxes on those earnings, but any new allowance designated by law is taxable.
Generally, when service members receive taxable pay, the military automatically withholds the appropriate amount from their paychecks. But the military does not withhold taxes on student loan repayments, and military members who benefit from this program may need to make estimated tax payments.
Legal assistance offices can provide details on taxes, and base disbursing offices have details on what pay is taxable. If reservists have been activated and sent to a combat zone or contingency operation, they may be eligible for tax-exempt status. In general, military members will find tax relief from the following:
Combat zones. Executive order or public law authorizes Combat Zone Tax Exclusion or Qualified Hazardous Duty Areas. Military personnel who served in the Arabian Peninsula, Afghanistan, the Balkans, parts of Africa and Central Asia and some other locations have earned certain tax exemptions.
The combat zones also include, but are not limited to Afghanistan, Saudi Arabia, Kuwait, Iraq, Oman, Bahrain, Qatar, the United Arab Emirates, Djibouti, the Philippines, Serbia, Montenegro, Albania, Adriatic Sea, Ionian Sea, Persian Gulf, Red Sea, Gulf of Oman, Gulf of Aden and a portion of the Arabian Sea.
Troops serving in designated direct support areas under operations Enduring Freedom, Noble Eagle and New Dawn also are entitled to the exemption.
All basic pay received by enlisted personnel serving in the combat zone is exempt from federal tax.
Officers pay taxes only on monthly pay above the highest enlisted pay rate plus $225 in monthly imminent danger pay. For 2012, that figure is $7,834.50. This affects only senior W-5s and most O-5s and above.
Bonuses earned in a combat zone also are not taxed. Troops who re-enlist in a combat zone, for example, do not have federal taxes deducted from their re-enlistment bonus or installments received after returning home. Bonuses not earned in combat zones, such as an installment from a previous re-enlistment, remain taxable.
Service members serving in danger areas associated with operations Enduring Freedom, Noble Eagle and New Dawn are eligible for the exemption, which also applies to troops serving in Bosnia and Herzegovina.
Those in Serbia and Montenegro receive the exemption as well if they are serving in direct support of an operation and are receiving imminent danger pay.
In some circumstances, tax exemptions extend past the time spent in combat. People hospitalized with wounds, disease or injuries sustained while serving in a combat zone are not subject to tax on military pay for any months beginning less than two years after the date of the termination of activities in the combat zone or qualified hazardous duty area.
Servicemembers’ Civil Relief Act. This law prevents states from taxing service members in the following situations:
– Service members do not have to pay personal property taxes, such as those assessed for automobiles, except to their state of legal residence. This applies only to property titled solely in the military person’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.
– Family members are not protected by the Servicemembers’ Civil Relief Act. They can be taxed by more than one state on personal property. Military legal assistance offices found on most bases can answer questions about individual states.
– Reservists can get temporary interest rate breaks on credit cards and other nonsecured forms of credit under this act when they are activated in support of contingency operations or national emergencies.
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 also can lay claim to service members’ bank accounts and 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 take 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, exchanges 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, Pennsylvania and Texas — pay cannot be seized to satisfy bad debts.
The Defense Finance and Accounting Service must give service 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 head off the deduction by proving the debt has been paid, the creditor’s claim is false or illegal, or there is a legal obstacle to collecting the money.
Debt counseling. 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
Social Security and Medicare taxes are paid by troops and the federal government. In 2012, the tax is 5.65 percent of basic pay for those earning up to $110,100 per year. On earnings above that, service members pay only the Medicare portion of the tax, 1.45 percent.