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Tax Breaks

Tax Breaks for Military Families

Military service is a tough job, but it comes with privileges at tax time.

Service members get a tax-free housing allowance, can qualify for tax-free pay while serving in a combat zone and have an extended tax-filing deadline while deployed -- giving them up to 180 days after returning from a combat zone to file their tax return.

They can also stockpile extra money for retirement in tax-deferred accounts. Not only can military personnel stash up to $16,500 in the federal Thrift Savings Plan in 2010, but they can also contribute all of their tax-exempt combat-zone pay (as long as total TSP contributions for the year don't exceed $49,000). Tax-exempt pay that goes into the TSP comes out tax-free in retirement. At the same time, they can contribute up to $5,000 to an IRA ($6,000 if 50 or older), even if their entire yearly income is tax-exempt combat pay.

Homeowner breaks. And now service members serving outside the U.S. for at least 90 days between December 31, 2008, and May 1, 2010, have an extra year to qualify for the $8,000 first-time home-buyer credit or the $6,500 credit for current homeowners. They have until April 30, 2011, to sign a contract and until June 30, 2011, to close on the new house. Normally, if homeowners don't live in the new house for at least three years, they have to repay the tax credit. But there's an exception for members of the military who have to relocate because of government orders.

Military families also get a special break when they sell their homes. Most homeowners need to live in a house for at least two of the five years leading up to the sale in order to claim tax-free profits of up to $250,000 ($500,000 if married filing jointly). But because they move frequently, military families need to live in the house for only two of the preceding ten years in order to qualify if they are on qualified official extended duty, which means living at least 50 miles from home or in government quarters.

For more details, see Kiplinger's Money Guide for Military Families at Military Families. Or see IRS Publication 3, Armed Forces Tax Guide.