Tax Rules for Military Stationed Overseas
For service members abroad, standard tax rules don't always apply. Understand the specific provisions that can alter your filing and payment duties.
U.S. military members serving in foreign countries operate under a unique set of tax circumstances. While they remain subject to U.S. tax laws, their obligations are modified by special provisions designed to address the realities of serving abroad. The tax framework for these service members includes regulations that affect how and when they file taxes, what income is subject to taxation, and how their state-level tax responsibilities are determined.
Federal Filing Requirements and Extensions
Members of the armed forces are required to file a federal income tax return, the same as any other U.S. citizen. The obligation to report worldwide income to the Internal Revenue Service (IRS) remains even when stationed in a foreign country. The IRS acknowledges that deployment can create obstacles to meeting the typical April 15 filing deadline.
General Overseas Extension
Service members stationed outside the United States and Puerto Rico on the regular tax filing deadline receive an automatic two-month extension to file their return. This pushes their deadline to June 16 without any need to file a special form, such as Form 4868. This initial extension is for filing the return, not for paying any tax due. If taxes are owed, interest will begin to accrue from the original April 15 due date.
Combat Zone Extensions
A more significant extension is granted to military personnel serving in a designated combat zone, applying to both filing a return and paying taxes owed. The deadline is postponed for the entire time the service member is in the combat zone, plus an additional 180 days after they leave the area. This 180-day period also applies if a service member is hospitalized outside the U.S. for injuries sustained in a combat zone. The IRS maintains a specific list of locations designated as combat zones.
Special Tax Exclusions for Military Pay
A financial benefit for military personnel is the ability to exclude certain types of pay from their federally taxable income, particularly for those serving in designated hostile areas. The rules governing these exclusions are specific and depend on the service member’s rank and location of service.
The most prominent provision is the Combat Zone Tax Exclusion (CZTE). For enlisted members, warrant officers, and commissioned warrant officers, their entire gross income earned while serving in a designated combat zone is exempt from federal income tax. For commissioned officers, this exclusion is capped at the highest rate of enlisted pay plus any imminent danger or hostile fire pay they receive. The exclusion covers active duty pay, reenlistment bonuses earned in the zone, and pay for accrued leave sold back while serving in the area.
Military members often ask if they can claim the Foreign Earned Income Exclusion (FEIE). Military pay is paid by the U.S. government and is therefore not foreign-sourced income. Consequently, service members cannot use the FEIE to exclude their pay from a U.S. tax return. The source of the income, not the location where it is earned, is the determining factor for this exclusion.
State Tax Obligations and Domicile
A service member’s state tax obligations are determined by their domicile, or State of Legal Residence (SLR). Domicile is the state an individual considers their permanent home and the place they intend to return to after military service. Simply being stationed in a new state or country on military orders does not automatically change a service member’s domicile.
Establishing or changing a domicile requires demonstrating clear intent to make a state one’s permanent home through actions like registering to vote, obtaining a driver’s license, and registering a vehicle. Once a domicile is established, the service member remains a resident of that state for tax purposes and will pay state income taxes on their military pay to their state of domicile.
The tax treatment of military income varies significantly by state.
- Some states with an income tax have laws that exempt all or part of military pay for resident service members serving outside the state.
- Other states tax military pay the same as any other income.
- A number of states have no personal income tax, which can be a financial advantage for service members who legally establish domicile there.
Tax Rules for Military Spouses
The Military Spouses Residency Relief Act (MSRRA) governs the tax situation for military spouses. This law allows a non-military spouse to maintain the same state of domicile as their service member spouse for tax purposes, even when moving to a different state or country under military orders. This allows the spouse to file state tax returns in the service member’s state of legal residence instead of establishing a new one.
This provision is an election, not an automatic rule. The spouse must meet certain conditions, primarily that they are in the new location solely to be with the service member who is there on military orders. By making this election, the spouse’s income from work in the new duty station state may not be taxed by that state. Instead, that income would be reported to and potentially taxed by the couple’s shared state of domicile, subject to that state’s specific laws.
An update under the Veterans Auto and Education Improvement Act of 2022 expanded the options for military spouses. A spouse can now elect to use the service member’s current duty station state for tax purposes. This provides flexibility, allowing the spouse to choose the tax residency that is most advantageous, whether it is the service member’s permanent domicile or their temporary duty station.
Tax Benefits for Homeownership
Military personnel who own a home receive special consideration regarding the capital gains exclusion when they sell their primary residence. The standard IRS rule allows a homeowner to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from their income. To qualify, the taxpayer must have owned and used the property as their main home for at least two of the five years immediately preceding the sale.
The “two out of five years” test can be difficult for military members to meet due to frequent relocations. A special exception exists for members of the uniformed services on “qualified official extended duty,” who can elect to suspend the five-year test period for up to 10 years. This suspension stops the clock on the five-year window while they are serving away from home.
Qualified official extended duty is defined as being required to serve at a duty station that is at least 50 miles from the main home or residing under government orders in government housing for more than 90 days. This provision allows service members to sell their home and still claim the full capital gains exclusion, even if they have not physically lived in it for several years due to military obligations.