Some Troops in Bosnia, Persian Gulf Not Exempt From State Taxes

Tax preparation is a major issue for deployed service members paying taxes to Alabama, California, Hawaii, Mississippi, New Jersey, Oregon, Pennsylvania and Wisconsin. Unless state legislatures adopt the federal changes before the end of the year, these service members face taxes on income exempt from federal income tax.

The major issue in the eight states is the tax exclusion, according to Air Force Lt. Col. David Pronchick, the armed forces tax counsel. Although most income earned in the qualified hazardous duty area is tax-free at the federal level, the eight states are have yet to declare the income tax-free for state purposes.

"There are certain cases where people deployed have no withholding taken from their monthly paycheck to cover state taxes," said Pronchick. "They either have to hope their states change the laws or get to a finance office to increase their state tax withholding." If necessary, he said, service members can change their state tax withholding by specifying a certain percentage dollar amount increase to avoid possible penalties and interest.

Last March, President Clinton approved changes giving service members in Bosnia, Croatia and Macedonia federal tax benefits "as if they were in a combat zone." These benefits include tax-free income for all enlisted and warrant officers, and extension of the federal income tax filing deadline.

The law also increased officers' monthly tax exemption from $500 to about $4,200. This change not only applies to officers serving in Operation Joint Endeavor, but also to those in the Persian Gulf combat zone.

Once Clinton signed the law, Pronchick began writing to state tax officials about changing their tax laws. "Most came back rather quickly -- some with legislation better than the federal government's," he said. Pronchick said Virginia, for example, excludes all officer income earned in hazardous duty zones -- a step beyond the $4,200 per month federal exemption.

The tax exclusion is not the only issue. Of the eight states, seven are not waiving interest payments on late taxes. New Jersey is not waiving its late filing penalty; nor is it granting extensions beyond the normal two months given for those assigned overseas.

Pronchick said some of those states have tax legislation proposed that would incorporate the federal changes. He said California's relief bill is proceeding through committee, and relief appears likely.

However, he added bills must wait in some states because legislatures recess in August. Still, Pronchick expects to see other changes as the year progresses.

The tax benefits differ for each state. Alabama -- one of the eight -- grants filing extensions and waivers for penalties but only excludes military income earned in the Persian Gulf region. The state needs a law change to include qualified hazardous duty areas such as Bosnia.

Some states don't require military personnel to file tax returns. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not tax military income.

Montana, Missouri, Vermont and West Virginia exempt military income, but require service members to file annually. Service members from Connecticut, Idaho, New York and Ohio must also file annually, but their income is tax-free provided they meet nonresidency requirements.

Pronchick said the tax counsel will provide updates as they become available. He added service members should get with their unit tax or legal assistance officers if they have questions about state tax requirements.