Special taxation rules apply for military personnel
Understanding the tax law may help ease the tax burden or possibly lower tax payments of military personnel. Here are some issues to consider:
» Filing extension
The IRS provides an automatic two-month extension to file returns and pay taxes owed for active-duty military personnel who are serving outside the United States and Puerto Rico.
A statement to claim the automatic extension should be attached to your tax return.
In addition, military personnel who serve in a combat zone during the April 15 tax filing deadline will be allowed a 180-day extended period of time to file returns and pay taxes. The 180 days begin on the last day of service in the combat zone. Hawaii income tax law also provides for an extension of time in filing tax returns for military personnel.
» Moving expenses
The cost of moving may be deductible if your move is pursuant to military orders and causes a permanent change of station. Moving expenses are deductible on Form 1040, and you do not have to itemize to receive the deduction. Qualifying expenses paid or incurred during the taxable year in connection with the move will be included in the deduction.
Qualifying moving expenses include moving household goods and personal effects. The cost of traveling (including lodging) to the new place of residence will also qualify. Deductible moving expenses will be reduced by any amount furnished or reimbursed by the military.
Distance and time tests are not required to be met by military personnel.
» State residency
Military personnel may have a "home of record" and "legal residence" that may or may not be the same. A "home of record" is where one was living when they enlisted in the military. A "legal residence" is the state where one intends to return and live after they are discharged or retire.
In general, a person who is domiciled in Hawaii for more than 200 days during a tax year is considered a resident. However, if you are in Hawaii due to military orders and do not intend to make Hawaii your permanent home, you are not considered a Hawaii resident for income-tax purposes. You will remain a resident of your state of "legal residence" and must file a tax return with that state, if required.
However, you are required to file a Hawaii non-resident and part-year resident return (Form N-15) if you have any Hawaii-source income.
One trap for the unwary military member is the taxation rules for his or her spouse. While the military member may have exempt pay in Hawaii, any Hawaii wages or earnings by a spouse are subject to Hawaii taxation. Likewise, Hawaii state residents who are stationed in another state will remain a Hawaii resident for income tax purposes.
» Military reserve or Hawaii National Guard duty pay exclusion
For 2006, Hawaii reserve and National Guard members can exclude part of their reserve or National Guard pay for Hawaii state income tax purposes. The amount of exclusion will be the lesser of $2,999 or the amount shown on Box 16 of the Form W-2 sent to you by your reserve component.
There are a variety of tax strategies and benefits for military members. Looking for guidance from your tax advisor, military newsletters, IRS website, and state Web sites are ways to gain more information.
Doreen Griffith is managing partner for the Honolulu office of Grant Thornton LLP. She can be reached at: Doreen.Griffith@gt.com