Individual Income Insights: Tax Codes Do Their Part to Support and Honor Veterans


 

Home of the Brave

Veteran’s Day is our annual opportunity to honor military heroes and thank them for their service. For those that believe one day is insufficient considering the magnitude of a service member’s sacrifice, they may be comforted to know that federal and state government tax codes benefit active service and retired veterans all year long. Through a variety of exemptions, credits, and incentives, service members can reduce their tax liability, increase refunds, and receive assistance for bills and medical expenses. 

Many states offer tax credits which incentivize employers to hire veterans, providing America’s heroes with some much needed stability during their transition from active duty to civilian life. Tax benefits are also intended to assist service members’ families who may need childcare services and supplies while a parent is away on active duty. Taking care of service members is an area of focus for the Trump administration, and many states have gladly followed this path. 

Reducing Service Members’ State Tax Liability

States offer a panoply of tax benefits to service members before, during, and after active duty. Most states conform to Internal Revenue Code sections 112 and 692, which exempt income earned while physically in a combat zone and forgive the tax liability of service members killed in action. Some states, such as Illinois and Arizona, exceed the federal exemption, extending the benefit to members of the Armed Forces Reserves or National Guard unit and cadets of a military training academy. 

Spouses can benefit too; since 2009, husbands and wives of active military personnel that move to Mississippi on military orders can retain their home state’s residency for state tax purposes. 

The preferential tax treatment continues through post-military civilian life and retirement, helping veterans find jobs and pay their medical bills. Iowa offers a reduction to an individual’s gross income for any grants provided through the Iowa Injured Veterans Grant Program, including amounts provided for travel expenses or unemployment assistance. New Jersey offers a $3,000 exemption for veterans who are honorably discharged from the military during the taxable year. Many states offer additional exemptions for military pensions, annuities, and disability. Some states extend the exemptions to retirement benefits paid to the surviving spouse of a service member. 

Giving Credit Where Credit is Due

The tax credit is an increasingly popular way to assist our veterans, by both incentivizing companies to hire veterans and, in some cases, increasing a service member’s tax refund. As troops withdrew from Iraq during the Obama administration, veterans came home to find an economy slowly recovering from the great recession. Veteran unemployment exceeded the national average, with disabled veterans feeling the pain of the financial crisis most acutely. Since then, 14 states have enacted some form of tax credit for employers who hire honorably discharged veterans. The credits offer a fixed dollar amount for each veteran hired within the year, with some providing an additional amount for employing a disabled veteran. Today, the unemployment rate among veterans is down to 4.3 percent (4.8 percent for those with a service-related disability). 

Two states, Minnesota and New Jersey, extend credits directly to resident veterans or their caregivers. The Minnesota credit, known as the Income Tax Credit for Past Military Service, is limited to $750, phases out for individuals who earn over $37,500, and is taken in lieu of pensions and other retirement plan subtractions to an individual’s gross income. New Jersey’s credit, known as the Wounded Warrior Caregivers Tax Credit, is equal to the lesser of military disability benefits received and $675, but is refundable, offering an opportunity to receive a direct governmental subsidy related to past active service. 

A majority of Americans have a favorable view of the military, according to a 2017 Gallup poll. Following that respect, state and local governments appear to echo this sentiment by providing service members and veterans additional support through tax benefits. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How can states improve the tax benefits offered to veterans? 

Get a free trial to Bloomberg BNA Tax & Accounting's State Tax solution, a comprehensive research service that provides deep analysis and time-saving practice tools to help practitioners make well-informed decisions.