When people talk about deployment, one thing that often comes up is money. How do taxes work? How much do people spend on deployment? What do you do about the bills? What’s the best way to save? The answers to these questions are different for everyone, and many of them depend on the specifics of the individual deployment and the person or family. While there are a million variables, the biggest one is whether you’ll be in a Combat Zone Tax Exempt (CZTE) area. But whether you’re CZTE or not, there are a lot of things to consider.
Many people qualify for extra or special pays or allowances while they are deployed, but there are a few situations where you lose some pay or allowances, too.
The most common extra pays and allowances during deployment include:
- Family Separation Allowance starts after 30 days: $8.33 per day, up to $250 per month
- Hardship Duty Pay for location or mission: $50, $100, or $150 per month
- Imminent Danger pay: $7.50 per day, up to $225 per month Hostile Fire pay: $225 per month, not pro-rated
The most frequently “lost” money during deployment is if you lose Basic Allowance for Subsistence (BAS) because your meals are being provided for free. This doesn’t happen in every situation, but it can and does happen.
As a rule, housing allowances remain at the service member’s duty station, unless they are in a specific situation like an individual augmentee assignment.
There may also be more money in your paycheck because taxes aren’t being withheld – see the taxes section below.
Deployment-related spending changes vary dramatically from deployment to deployment and from family to family. Even in my own family, we’ve gone from one deployment where I worked two jobs, my husband had three short port calls to the same location, and we spent every single dollar paying off debt and saving, to another deployment where we spent a ton of extra money on babysitters and household help because I was pregnant with three teeny kids.
There are two sides to the deployment spending issues: ways you might save, and ways you might spend more.
If you’ve been through a deployment before, you can probably think of some things to add to this list above – please share your experiences in the comments!
The whole “tax-free” thing can be super-confusing, but it doesn’t have to be. Let’s start with a couple of things to know:
- You have to be in a designated CZTE in order to be “tax-free.”
- It can take a while for the paperwork to catch up with your location.
- Base pay, up to a certain amount, is tax-free when you’re CZTE.
- Most stuff should happen automatically – you shouldn’t be doing any extra math when you file your tax return.
While you’re actually in the CZTE, the most important part is that you’re not having taxes withheld on your pay. Typically, commands do a pretty good job of making sure that paperwork is up-to-date. It may not happen immediately, but it usually happens without you having to do anything. Suddenly, your paycheck is larger, because there is no withholding. Ka-ching!
When people start to truly get confused is when it is time to their income tax return the following year. I get emails asking me, “Where do I deduct my combat zone money?” or similar questions. You shouldn’t be doing any special math on your income tax return, with the exception of a few credits that let you count CZTE income as income in order to qualify for those credits, but that’s pretty clearly marked. Your W-2 Wage and Tax Statement should reflect your taxable income in Box 1 – the CZTE income isn’t included here, so there’s no math to do. The money earned while you are in a CZTE will be shown in Box 12a, with a code Q beside it, in case you need it for one of those special situations. Your W-2 should also show the lower amount of money you’ve had withheld during the year. When you do your tax return, the CZTE income and lower withholding is already factored in because it’s already shown on your W-2.
Whether or not you get a larger refund, owe money, or come out just the same will depend on a wide variety of factors, including your other income, your family size, any other deductions you may be able to take, credits, etc. In theory, the idea is that you should be coming out close to the same on your tax return. In reality, sometimes being CZTE makes you eligible or not eligible for certain credits that change your situation a lot.
Now, if your W-2 is wrong, that’s a whole different situation and needs to be handled through the Defense Financial and Accounting Service (DFAS). You can’t just change the numbers on your tax return; you need to get an updated W-2 that has the right information on it.
Thrift Savings Plan
If you’re deployed to a CZTE, you have a unique opportunity to really sock away some tax-free money into your Thrift Savings Plan (TSP) accounts, and/or contribute more than you usually can, and/or beef up your taxable accounts. There are three main thing here: tax-free income, higher contribution limits, and the times where it makes more sense to put that money in a taxable account.
At the most basic level, contributing money into your Roth TSP account while you’re in a CZTE is a win-win-win: the money goes in tax-free, it grows tax-free, and it isn’t taxed when you take distributions. It’s one of the few ways you can ever get completely tax-free growth on money.
- If you’re not contributing to TSP now, start!
- If you’re contributing to traditional TSP, Roth might be the right choice for you during deployment.
- If you’re already contributing to a Roth TSP account, tighten up that belt and figure out how you can increase your contributions!
Under normal circumstances, the Elective Deferral Limit of $19,500 (2020) is how much you can contribute to your TSP account each year. However, during times when you are in a CZTE area, you can contribute up to the Annual Addition Limit of $57,000 (2020). That’s a lot of money! Both of those numbers increase by $6,500 if you’re age 50 or above!
There are some tricks if you expect to be able to contribute to more than the Elective Deferral Limit – that’s a little advanced for this article but you can read more about it at Maximizing Your Thrift Savings Plan Contributions In A Combat Zone.
Saving In A Taxable Account
So, this is working on some higher math, but there are some situations where it’s better to save your money in a regular, taxable account, not a tax-advantaged retirement savings account. Regular accounts are a lot more flexible, and there are some situations where it makes sense from a tax standpoint, too. Check out Airman Mildollar’s post on Tax Considerations In A Combat Zone for more thoughts on this subject.
In some situations, you may be able to get lower payments, reduced interest rates, or other benefits because of a deployment. Check with your credit cards, your cell phone company, your insurance company, and anyone else you can imagine to see if they have any special programs for deployment.
Savings Deposit Program
The Savings Deposit Program (SDP) is a government-run savings account that pays 10% while you are in an area eligible for Hostile Fire or Imminent Danger Pay. You can contribute to that account once you’ve been in the designated area for 30 days, or 1 day in each of 3 consecutive months. Contributions can be made by allotment from your pay. You can also allegedly make contributions by cash or check at the finance office at your deployed locations, but let’s be realistic, there aren’t many finance offices left and deployed locations aren’t known for being able to handle unusual requests.
Pre-Deployment, R&R, and Post-Deployment Spending
The periods right before and right after a deployment, and during R&R, can be periods of exceptionally high spending for military families. That’s fine if they have budgeted, have the money, and are making smart choices despite the timing. It can be a problem if that spending is beyond the person/family’s ability to pay for it, or if they’re spending on things that don’t otherwise make sense.
Gosh, that seems like a lot of words that don’t really come together very well. Let’s try an example. Smart pre-deployment spending might include uniform parts, a special dinner or trip paid for in cash, or things to make the deployment more comfortable (provided you’re not using debt to purchase any of these things.) Dumb pre-deployment spending might include an extravagant vacation you can’t afford or a good-bye gift that’s out of your budget.
The same idea applies to mid-tour R&R spending and post-deployment spending. Post-deployment spending can be particular troublesome, especially when it takes the form of buying a car (and taking on a car payment.) That’s not to say you can’t buy a car when you come home from deployment, but rather it needs to be a car that makes sense in the bigger picture. I’ve seen too many people with expensive cars, purchased with money saved during deployment, that can’t afford the gas and the insurance and the maintenance.
It’s normal to have some extra spending before and after a deployment, and if you get mid-tour leave. Just be sure it works for your regular life and your regular budget.
What Happens When You’re Apart
Even though it is 2020, there are situations where the deployed service member isn’t available to talk to whomever is handling their finances back home. And they may not be able to download statements, pay bills, etc. Most military members hopefully have a trusted person to whom they can grant a power of attorney for handling their finances – a spouse, a parent, a sibling, or a best friend. This is a lot of power, though, so you can’t give it just anyone. Be sure it someone who will continue to have your best interests in mind, no matter how long the deployment lasts.
Families should take some time pre-deployment to go through some what-ifs: What if the car needs major repairs? What if our landlord sells the house? What if someone passes away? This way, the different family members can understand how the deployed service member thinks about spending money in each of these situations. For example, let’s say you have an older car. Is the service member thinking that she’d like to drive it forever, so it should be repaired, or is it time to move to something larger for your growing family, so it would make sense to move on to a new car?
Dictionary.com defines Murphy’s Law as “the factious proposition that if something can go wrong, it will.” I don’t think there is anything facetious about it: Murphy’s Law hits when you have a deployed service member. Clothes washers will break, kids will get sick, cars won’t start. It’s a lot more manageable if you have mentally prepared for stuff to happen, and it’s vital that you have an emergency fund so that you won’t find yourself in financial distress when Murphy comes to visit.
While military pay can get messed up at any time, it’s easier during deployment. There are a lot of things changing, and sometimes those changes don’t happen the way they are supposed to. As always, it’s important to read your Leave and Earnings Statement (LES) each month, and make sure everything makes sense. And if you are overpaid, be sure to put that money aside, in a separate bank account (or even a separate bank!) so that you’ll be prepared when the Department of Defense realizes what’s happened and decides you need to repay.
I’m sure y’all can think of more things I should have mentioned, but I didn’t want to scare anyone as I’m already at 2,000 words on this “little” post. But share your experience in the comments!
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