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Tax Credits: Members of the Armed Forces

Tax Credits: Members of the Armed Forces

December 27, 2022
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In general

The federal government provides tax relief to qualifying individuals in the form of tax credits. Tax credits are valuable because they are dollar-for-dollar reductions of your tax liability. In some cases, they may result in tax refunds. In general, the rules regarding tax credits are the same for members of the Armed Forces as they are for everyone else. Nevertheless, certain tax credits may be of particular interest to members of the military. The following discussion explains eligibility requirements of the earned income credit (EIC), the child tax credit, and the child and dependent care credit (CDCC) (there are other available tax credits not discussed here). Also discussed are some eligibility factors as they specifically pertain to service members.

Earned income credit

In general

The earned income credit (EIC) is available to certain individuals who work. This credit is refundable — if the amount you claim exceeds your tax liability (even if your liability is zero), you'll receive payment for the difference. How much you get depends on how much your earned income is and how many children you have. For 2022, the maximum EIC amount is $560 if you have no qualifying child, $3,733 if you have one qualifying child, $6,164 if you have two qualifying children, and $6,935 if you have three or more qualifying children.

Several factors determine your eligibility for the EIC. Generally, you (and your spouse, if applicable) must:

  • Have earned income (i.e., income you work for; including wages and net earnings from self employment)
  • Have a valid Social Security number
  • Have investment income, if any, that does not exceed $10,300 (in 2022)
  • Be a S. citizen or resident alien all year (or married to one and choosing for tax purposes to be treated as a resident alien for the year)
  • Not be a qualifying child of another taxpayer
  • Not file as married filing separately (credit may be available for certain separated spouses who file separately)
  • Not file Form 2555 or 2555-EZ (pertaining to foreign earned income)
  • Meet appropriate income qualifications

In addition to the above requirements, you must meet other requirements. The specific requirements that apply depend on whether or not you have a qualifying child.

With qualifying child

If you have a child (or children) and wish to claim the EIC as a taxpayer with a qualifying child, your child must have a valid Social Security number and meet all three of the following requirements:

  • The child must have lived with you in the United States for more than half the year (temporary absences due to special circumstances are not treated as absences)
  • The child must be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendent of such A child who is legally adopted by, or lawfully placed for adoption is a qualifying child. A foster child who is placed by an authorized agency, judgment, decree, or other such order is also a qualifying child.
  • Generally, the child must be under age 19, under age 24 if a full-time student, or permanently and totally

Caution: If you file for the EIC as a taxpayer with a qualifying child, you must complete Schedule EIC and attach it to your tax return.

Tip: U.S. military personnel stationed outside the U.S. on extended active duty are considered to live in the U.S. during that duty period for purposes of the EIC. (Extended active duty means that you are called or ordered to duty for an indefinite period or for a period of more than 90 days.)

Without qualifying child

If you don't have a child who qualifies under the EIC criteria, you may still be eligible for the EIC. In addition to the general EIC eligibility requirements listed above, you (or your spouse if filing a joint return) must:

  • Be at least age 25 but under age 65 (for 2021 only, the minimum age was lowered from 25 to 19 (24 for certain full-time students) and the maximum age limit of 64 was eliminated)
  • Not be eligible to be claimed as a dependent on another taxpayer's return (regardless of whether the taxpayer actually claims you as a dependent)
  • Have your main home in the United States for more than half the year

Tip: Individuals in the Armed Forces who are stationed outside the United States on extended active duty are considered to be living in the United States. If you're temporarily absent from your home solely on account of military service, you may still be eligible for the EIC if you plan to return to your main home at the end of your assignment.

Starting in 2021, taxpayers otherwise eligible for the credit except that their children do not have Social Security numbers can claim the credit for individuals with no qualifying children.

Income guidelines

Finally, to be eligible for the EIC, you must fall within certain income guidelines. To qualify for the full amount of the EIC, your earned income and AGI must each be less than:

  • $9,160 ($15,290 if married filing jointly), if you don't have a qualifying child for 2022
  • $20,130 ($26,260 if married filing jointly), if you have one or more qualifying children for 2022

If your earned income or AGI is above these limits, your EIC eligibility begins to phase out, and is eliminated completely when either amount reaches:

  • $16,480 ($22,610 if married filing jointly), if you don't have a qualifying child for 2022
  • $43,492 ($49,622 if married filing jointly), if you have one qualifying child for 2022
  • $49,399 ($55,529 if married filing jointly), if you have two qualifying children for 2022
  • $53,057 ($59,187 if married filing jointly), if you have three or more qualifying children for 2022

Nontaxable combat pay election

You can elect to include your nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q. Electing to include nontaxable combat pay in earned income may increase or decrease your EIC.

Figure the credit with and without your nontaxable combat pay before making the election. Whether the election increases or decreases your EIC depends on your total earned income, filing status, and number of qualifying children.

Child tax credit

In general

If you have a child (or children), you may qualify for the child tax credit. If the credit exceeds your tax liability, you might be able to receive a refund for all or a part of the difference (see below for more on this). Like the EIC (see above), how much you get depends on your level of income and how many children you have. In 2022, the maximum credit is $2,000 for each qualifying child. For 2021 only, the child tax credit amount was $3,000 per qualifying child ($3,600 per qualifying child under age 6).

A qualifying child

To qualify for the child tax credit, your child must meet all of the following tests:

  • The child must have lived with you for more than half the year (temporary absences due to special circumstances are not treated as absences)
  • The child must be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendent of such A child who is legally adopted by, or lawfully placed for adoption with you is a qualifying child. A foster child who is placed with you by an authorized agency, judgment, decree, or other such order is also a qualifying child.
  • Generally, the child must be under age 17 (age 18 for 2021 only); must be a S. citizen, a U.S. National, or a U.S. resident alien; and must be claimed as a dependent on your return.

Income limitations

The child tax credit is limited if your modified adjusted gross income (MAGI) is above a certain amount. (Your MAGI is your AGI plus income ordinarily not included in your AGI, such as foreign earned income and tax-exempt interest income.) The credit begins to phase out if your MAGI exceeds:

  • $400,000 for joint filers
  • $200,000 for single and head of household filers
  • $200,000 for those married filing separately

Special rules started phasing out the increased portion of the child tax credit in 2021 at much lower thresholds than under pre-existing rules. The credit, as reduced under the special rules for 2021, was then subject to phaseout under the pre-existing phaseout rules. The following table summarizes the effect of the phaseouts on the child tax credit in 2021 only, based on MAGI.

 

Single/Married filing separately

Married filing jointly

Head of household

Combined credit

Up to $75,000

Up to $150,000

Up to $112,500

No reduction in credit

$75,001 to $200,000

$150,001 to $400,000

$112,501 to $200,000

Credit can be reduced to

$2,000 per qualifying child,

$500 per other dependent

More than $200,000

More than $400,000

More than $200,000

Credit can be reduced to $0

 

Refundable portion of the child tax credit ("additional child tax credit")

For most taxpayers, the child tax credit was fully refundable for 2021 only. Otherwise, a portion of the child tax credit ($1,500 in 2022) may be refundable (i.e., you can get a refund if the credit exceeds your tax liability). The refundable portion can be as much as 15 percent of your earned income in excess of $2,500.

For purposes of calculating the refundable portion of the child tax credit, nontaxable (excludable) combat pay is included in earned income — this will generally serve to increase the refundable portion.

Child and Dependent Care Credit

In general

The child and dependent care credit (CDCC) helps parents pay for child care so they can work. The CDCC is a nonrefundable credit for up to 35 percent (50 percent for 2021 only) of certain expenses you paid to provide care for a qualifying person. The qualifying person may be either a child under age 13 whom you claim as a dependent, or a spouse who is physically or mentally incapable of self-care. An individual of any age who is physically or mentally incapable of self-care and whom you can claim as a dependent would also be a qualifying person.

To qualify to take the credit, you must meet all of the following eligibility criteria:

  • You (and your spouse if you're married) must maintain a home that you live in with the qualifying person(s)
  • You (and your spouse if you're married) must both have earned income (i.e., income you work for) during the year (only you must have earned income if your spouse was either a full-time student or physically or mentally incapable of self-care)
  • You must pay child and dependent care expenses so you (and your spouse if you're married, unless your spouse was either a full-time student or physically or mentally incapable of self-care) can work or look for work
  • You must make payments for these expenses to someone whom you (or your spouse) can't claim as a dependent, and you must identify the care provider on Form 2441 attached to your tax return
  • Generally, your filing status must be single, head of household, qualifying widow(er) with dependent child, or married filing jointly (unless you meet certain exceptions)

Caution: The credit applies only to expenses that you paid. Dependent care assistance including child care provided by the Department of Defense to members of the military is not included in gross income. This means that you can only take this credit to cover expenses you paid to the extent that it exceeds any allowance you receive.

The amount of your work-related child and dependent care expenses is subject to both an earned income limit and a dollar limit. Expenses cannot be greater than either your earned income, or (if you're married at the end of the year) the lesser of your earned income or your spouse's earned income. The dollar limit for expenses is $3,000 ($4,000 in 2021 only) for one qualifying person or $6,000 ($8,000 in 2021 only) for two or more qualifying persons. The amount of your credit will be a percentage (20 percent to 35 percent (50 percent in 2021 only)) of allowable expenses.

Caution: Remember that the CDCC is a nonrefundable tax credit. As such, it is limited to the amount of your tax liability. If the amount of the credit is greater than your tax liability, you won't receive a refund for the difference. For most individuals, the credit was fully refundable for 2021 if it exceeded tax liability.

For more information on this tax credit, see IRS Publication 503.

Maintaining and living in a home requirement

Generally, you're maintaining a home if you pay for more than half the annual cost of running the home with your own funds. The cost of running the home normally includes expenses such as paying property taxes and mortgage interest. As a member of the Armed Forces, you may receive a housing allowance — the BAH — and you may use these funds to pay those expenses. For the purpose of determining your eligibility for the CDCC, these funds are considered your own funds. When determining if you're paying more than half the annual costs of running your home, you need not reduce those costs by the BAH you receive.

Individuals in the Armed Forces who are stationed outside the United States on extended active duty are considered to be living in the United States. Therefore, if the qualifying person on whom you're basing eligibility for the CDCC lives in your home of record within the United States while you're stationed overseas, you satisfy the criteria of living with that person.

Earned income by both spouses requirement

It's important to note that, if you're married, both spouses must have earned income to be eligible for the CDCC. (An exception to this requirement exists if one spouse is either a full-time student or physically or mentally incapable of taking care of himself or herself). If your spouse did not work, you cannot claim this credit.

Earned income generally includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. For purposes of the credit for child and dependent care expenses, earned income is considered to include nontaxable employee compensation such as military basic quarters and subsistence allowances and in-kind quarters and subsistence, as well as military pay earned in a combat zone.

Your CDCC is a percentage of your allowable work-related child and dependent care expenses, and this percentage increases as your AGI decreases.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This article was prepared by Broadridge.

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