The Secret National Guard and Reserve Tax Break You Might Not Know
Military reservists are entitled to a tax benefit for unreimbursed business expenses for drill mileage, lodging, meals and other incidental expenses -- but only if they or their tax preparer can figure out where to include it through their tax preparation software.
This tax break is not a deduction nor a credit, but rather an adjustment to income for expenses incurred for travel more than 100 miles from home to fulfill duties as a member of the Reserve Component. The Reserve Component is a technical term that includes National Guard and reservists. The Internal Revenue Service refers to this group collectively as "reservists."
How to get this tax break
These travel expenses go on form 2106-EZ, and are reported on line 24 of form 1040. Forms 1040EZ and 1040A can't be used if a service member has these expenses. It is crucial to note that line 24 is one of the adjustments to income, and these expenses are not an itemized deduction. Professional tax preparers frequently miss this or incorrectly assume it is an itemized deduction.
Typically, the most valuable expense adjustment for reservists is the "mileage" expense, using the standard mileage rate as opposed to actual cost. The standard mileage rate for 2016 was 54 cents per mile, and for 2015, it was 57 cents per mile. This rate changes annually based on the price of gas and is determined by the IRS. Taxpayers almost always will come out ahead using the standard mileage rate.
Claiming this adjustment can bring big savings to reservists. For example, if a member drove 150 miles one way to drill 11 times per year, 3,300 miles at the rate of 54 cents per mile would be an adjustment to income of $1,782. If the taxpayer's highest tax bracket was 15 percent, this would be $267 less federal income taxes that would be paid. In the 25 percent bracket, that would be a savings of $446.
Parking fees, tolls, ferry fares, train tickets and airfare also can be listed as travel expenses. It is not uncommon for National Guard members and other reservists to fly or take a ferry to drill.
The entire cost of these travel expense are allowed as an adjustment. The instructions to form 2106EZ even list telegrams as an incidental expense. Perhaps it's time for the IRS to revamp this antiquated and confusing form?
Service members also can list as an expense the amount spent on lodging, not to exceed the federal per diem rate. However, it would appear from the instructions that only service members who drive 100 miles or more one way can list this expense.
Meals also are an allowable expense on line 6 of 2106-EZ, which indicates 50 percent of meal costs qualify although, again, they are not to exceed the per diem rate. The instructions to form 2016EZ are somewhat unclear, as it is designed for individuals who work in private industry and also for reservists.
"If you qualify, complete Form 2106-EZ and include the part of the line 6 amount attributable to the expenses for travel more than 100 miles away from home in connection with your performance of services as a member of the reserves on Form 1040, line 24, and attach Form 2106-EZ to your return," the IRS instructions state. "The amount of expenses you can deduct on Form 1040, line 24, is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses), plus any parking fees, ferry fees, and tolls. These reserve-related travel expenses are deductible whether or not you itemize deductions."
These expenses are frequently overlooked by tax professionals and by service members. This is attributable in part to the lack of clarity in the instructions and the fact that most, if not all, tax software would never take the taxpayer to the correct section unless these rules were known and understood to the preparer or taxpayer from the outset.
To add to the confusion, most tax software incorrectly categorizes unreimbursed employee business expenses as credits and deductions, which they are not.
The form itself is designed for many different categories of professions, and not all of the rules detailed apply to all of them. It would be helpful for National Guard and Reserve Component troops if the IRS made a form just for them instead of lumping them with civilians who work for businesses and have a different set of tax rules to follow.
How to get this tax break for past years
The good news is that tax returns can be amended for three years plus any time spent deployed to qualifying locations by eligible individuals. The 2013 return still can be amended all the way through April 15, 2017, as can the state returns.
Returns are simple for the original preparer to amend, and many tax preparation businesses have a guarantee and will go back beyond the three years. They won't be actually able to amend them with the IRS, but they can prepare the amendment and refund the amount that would have been received had the taxes been prepared properly.
It is more difficult to amend a return that was prepared by an individual. Once the year ends, amendments can no longer be prepared electronically and must be prepared manually. In some cases, it very well may be worth it to pay a preparer to amend the returns.
Before amending a return or following tax advice, it is smart to speak to a tax expert who is familiar with your particular situation. Guard, Reserve and active-duty service members can use free tax preparation and free tax counselors through MilitaryOneSource.mil to prepare their returns.
-- Jennifer Lear, JD, AFC(r), is an attorney and accredited financial counselor residing at Fort Knox, Kentucky. She has been an Army spouse for more than 20 years and has worked with military populations in various capacities throughout that time. She can be reached at firstname.lastname@example.org.
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