Tax credits reflect value of serving
By Tom Philpott
If tax laws mirror a nation's values, then America clearly values its military personnel — and more so today than even just a few years ago.
Combat-zone tax exclusions, combined with changes to the Earned Income Tax Credit and child tax credits, have reduced or even wiped out the tax liability of thousands of military families. For many, taxes have been replaced by extra cash in the form of refundable tax credits.
"That's exactly what these credits were designed to do for the low-income individual," said Vincent Mullett, a retired Marine and a senior IRS tax specialist in San Marcos, Calif., near Camp Pendleton. But Mullett said he knows of colonels who now qualify for the earned-income tax credit and child tax credits.
Even in peacetime, military personnel enjoy some tax breaks. That's because a portion of military pay is provided as tax-free housing and food allowances, or "in kind" government housing and meals. On average, allowances represent roughly 25 percent of officer compensation and 33 percent of enlisted compensation, said Army Lt. Col. Jane Fenton, executive director of the Defense Department's Armed Forces Tax Council. The average value of tax breaks on those allowances, she said, is about $5,000 for officers and $2,500 for enlisted members.
In a combat zone, all enlisted and warrant officer pay is non-taxable. Only the combat tax exclusion for commissioned officers is capped, at $6,529 tax-free a month for 2005. A member who serves even a day in a combat zone receives that month's pay tax free. Likewise, all bonuses or special pays received are tax-free.
Combat tax breaks become even more valuable when combined with tax credits available to millions of other Americans. Here's how:
In 2003, when U.S. forces invaded Iraq, many low-income military families saw their earned-income tax credit fall because combat-zone service had left them with little or no taxable income. Ironically, many officers suddenly qualified for the credit because long combat tours had lowered their taxable income sharply.
The Working Families Tax Relief Act of 2004 corrected this inversion. It allowed members to choose whether to include combat-zone income when calculating the credit. Higher-income personnel continue to exclude combat-zone pay to qualify for the tax credit; lower-income personnel include their combat-zone pay for the same reason, to qualify for or raise their tax credit.
For these families, Congress approved the Additional Child Tax Credit. This one can convert the unused portion of the Child Tax Credit into a cash refund. Many military families qualify.
