Back in November 1919, President Woodrow Wilson first proclaimed November 11 as “Armistice Day.” He noted that: “To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations.”
Initially intended as a celebration of the end of World War I, in 1954 President Dwight D. Eisenhower subsequently issued a proclamation changing the day to honor all veterans. “In order to ensure proper and widespread observance of this anniversary, all veterans, all veterans’ organizations, and the entire citizenry will wish to join hands in the common purpose. Toward this end, I am designating the Administrator of Veterans’ Affairs as Chairman of a Veterans Day National Committee, which shall include such other persons as the Chairman may select, and which will coordinate at the national level necessary planning for the observance. I am also requesting the heads of all departments and agencies of the Executive branch of the Government to assist the National Committee in every way possible.”
The respect, and perquisites provided to veterans for their sacrifices to our country, have even touched the world of payroll, and on Veterans Day, we present a quick retrospective of some of the special tax provisions offered for veterans. Tax law defines “military service” as those who are in the Armed Forces, the Army National Guard and the Air National Guard when engaged in active duty for training, inactive duty training, or full-time National Guard duty, the commissioned corps of the Public Health Service, and any other category of persons designated by the President in time of war or national emergency [38 USCS 4304(16)].
Overview of tax breaks for those serving in the military
There are special rules regarding taxation that apply to those in the military, including supplementary military leave pay provided by employers and reservists (see Payroll Guide ¶3745 for information on military pay).
Federal income tax withholding (FITW). Compensation paid to a member of the U.S. armed forces for military service is generally subject to FITW. However, compensation paid to a U.S. armed forces member on active service is exempt from FITW for any month during which the individual: (1) serves in an area declared by the president to be a combat zone; or (2) is hospitalized as a result of wounds, disease, or injury in service in a combat zone (except that this exemption is limited to months within two years after the termination of combat activities). If the member of the armed forces is a commissioned officer, the FITW exemption for combat or hospitalization pay does not apply to amounts in excess of $500 per month [Code Sec. 3401(a)(1); Reg. § 1.112-1(a)].
Federal social security and Medicare taxes (FICA). A member of the U.S. armed forces is subject to FICA on his or her “basic pay,” which is a set allowance based on grade or rank and which does not include incentive pay, retainer pay, or other special pay. A member who is on inactive-duty training is subject to FICA only on the apportionment of basic pay he or she is entitled to Code Sec. 3121(i), Code Sec. 3121(m)].
Federal unemployment tax (FUTA). Military service is exempt from FUTA [Code Sec. 3306(c)(6)].
Types of Military Pay.
There are two types of government-provided military pay – combat pay and noncombat pay. “Combat pay” is military pay received for active service in a state National Guard or in the U.S. Armed Forces in a combat zone (or while hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone or while serving in direct support of the military operations in the combat zone). “Noncombat pay” is military pay received for regular or reserve service in the U.S. Armed Forces or for temporary duty in a state National Guard.
Employer-provided military pay refers to payments made by employers to employees to supplement government-provided military pay. For tax purposes, it is necessary to distinguish between supplemental military payments made to employees receiving combat pay and payments made to employees receiving noncombat pay.
Servicemembers Civil Relief Act
Under the Servicemember’s Civil Relief Act, a taxpayer in the military service does not lose his or her resident status from his or her home state as a result of being out of state due to military orders. Pay received for Military Service is not deemed to be pay for work performed in the assigned state.
Treatment of income of military spouses
The Veterans Benefits and Transition Act, which was passed December 31, 2018, amended the Servicemembers Civil Relief Act to provide that the spouse of a servicemember may elect to use the same residence for state tax purposes as the servicemember regardless of the date on which the marriage of the spouse and service member occurred, even if the spouse has a different domicile or residency.
On November 11, 2009, President Obama signed into law the Military Spouses Residency Relief Act (Act). The Act amends the Servicemembers Civil Relief Act to provide that a spouse shall neither lose nor acquire domicile or residence in a state when the spouse is present in the state solely to be with the servicemember in compliance with the servicemember’s military orders if the residence or domicile is the same for both the servicemember and spouse (see Payroll Guide ¶5001).
State treatment of tax treatment of military spouses. Forty states have issued their own guidance after the passage of the Military Spouses Residency Relief Act, following the federal tax treatment.