1 - Early career: combat pay
In today’s military, it won’t take a young officer too long to deploy to a combat zone. Servicemembers are well aware pay earned in a combat zone can be tax-free. For officers, pay received up to the highest rate of enlisted pay plus imminent danger/hostile fire pay is tax-free. But that is just the beginning of how the tax code interacts with your combat pay. Two other areas might give you significant flexibility to decrease your tax bill — or even eliminate it and get additional money.
Earned Income Tax Credit (EITC). The EITC first was established in the 1970s to help low-income wage earners. The credit is refundable, meaning if the credit is larger than your total tax bill, you will receive the remaining credit as money in your pocket. For a family of four (two children), the credit is available for those with adjusted gross incomes less than $48,378. (The taxpayer also must have less than $3,300 in investment income.) The maximum credit is $5,372 for tax year 2013.
Additional Child Tax Credit. The additional child tax credit is a refundable tax credit for dependent children under age 17. The credit is for individuals who get less than the full amount of the child tax credit. How would these two credits work together with combat pay? In general, military officers will want to exclude combat pay from the EITC and additional child tax credit calculations. (This might not be the case for noncommissioned officers and enlisted servicemembers. They might want to add it back in.) The end result can be significant. For example, a married O-3 with two children and six years of service who deploys to a combat zone for eight to nine months will receive the maximum credit. The O-3 not only will zero out his or her tax bill but also will receive in excess of $7,000 cash in pocket. Smaller credits are available for those who deploy for shorter periods.
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