If you've recently enlisted in the armed forces and are a resident of the state of Pennsylvania, you may be able to enjoy some significant tax benefits not available to the civilian population. However, at times these benefits can make your taxes more complicated than those of the average wage earner, and you may struggle to understand the various exclusions and exceptions that can apply to certain portions of your military income. Read on to learn more about how your military pay and benefits are treated under federal and Pennsylvania tax laws.
How is your military pay taxed by the federal government?
In general, pay you receive from the federal armed forces or the Pennsylvania National Guard is subject to regular federal income taxes -- however, there are some exemptions that can help reduce your taxable income (and therefore the amount you pay). You should be able to deduct the cost of any hotel rooms or other accommodation expenses you've incurred while traveling for the military. You'll also be able to significantly extend the "ownership and use" period that provides you with certain tax benefits after selling a primary residence (rather than classifying this residence as a rental because you've been stationed elsewhere for an extended period of time).
Income you receive while stationed outside Pennsylvania in active-duty combat is deducted from your income for federal tax purposes, and this exclusion extends to all income earned during any month in which you served. For example, if you're on an active tour of duty from January 30 to August 2, and then on inactive duty until the end of the year, you'll only be considered to have earned taxable income from September through December of that year.
How is your military pay taxed by Pennsylvania?
Like the federal government, Pennsylvania excludes from your taxable income any income earned while on active duty outside the state of Pennsylvania. Pennsylvania's definition of active duty can also include out-of-state military training, which means you can even exclude the pay you received during boot camp from your taxable income. However, you'll still be subject to Pennsylvania's state income tax on your military income earned while stationed in Pennsylvania.
For spouses who have followed you to Pennsylvania but who are still working remotely for their employer in your former state, this income may be excluded from Pennsylvania's income taxes but subject to income taxes of the state in which they're earned. This can provide some major tax advantages if your spouse works remotely from one of the several states with no income tax.
For more information, contact services like Waggoner Frutiger & Daub CPA's.