Winning Military Tax Returns

Ahhhh tax season… every service member’s favorite time of the year… that magical time of year where having three strap-hanging, leech monsters (I mean angelic children) actually pays off, where that “voluntary” contribution to the Army Combined Federal Campaign fund miraculously becomes a “charitable contribution”, and that nine month deployment wonderfully puts you below the poverty line so you qualify for that Earned Income Tax Credit! Read on if you want to truly maximize your military tax return!

Sadly, it’s also that time of the year where many of you get excited because all the money you’ve overpaid the government all year gets dumped back into your bank account because your withholding is all jacked up (BTW this isn’t a good thing, but more on that later).

Whether you are excited or cringe at the thought of doing your tax, the simple truth is that many service members (especially young ones) have not been taught or taken the time to educate themselves on how to truly maximize their military tax return. A vast majority simply go to the on-post tax office or the local HR Block, dump their W-2’s and 1099’s on the CPA’s desk and hope for the best. Or they attempt do their own taxes without having the first clue of what the difference is between a Tax “Credit” vs a Tax “Deduction” or what the difference is between standard and itemized deductions. Because of this “ignorance is bliss” mentality, many service members miss out on hundreds to thousands of dollars in credits and deductions, or vastly over-pay the government throughout the year.

Bottom-Line, Up-Front:

1. Adjust your withholding in Mypay so you stop overpaying federal and state taxes every month.
2. You most likely qualify for the Earned Income Tax Credit if you deployed to a combat zone for decent amount of time.
3. You most likely qualify for the Saver’s Tax Credit if your are a lower enlisted / junior officer who contribute to their TSP each month.
4. It makes more sense to file “Married filing jointly” in 90% of circumstances.
5. Use your tax return to pay down debt.

Amplifying Information

This article will not attempt to teach your every nuance and loop-hole that exists when filing tax returns, as every tax return has vastly different situations. Instead it will cover the “big blocks” that each service member should be familiar with when it comes tax return time. These big blocks are:

• Important Definitions
  • Return, credit, deduction, withholding, taxable income, etc
• Withholding
  • How much money should you pay the government each month?
• Common Tax Deductions
  • Moving Expense Deductions, Mortgage Interest, Property Tax, etc
• Common Tax Credits
  • Child Tax Credit, Earned Income Tax Credit, Saver’s Credit, etc
• Filing Status
  • Married filing jointly vs Married filing desperately (I mean separately)
• What to do with all that tax refund?
  • The answer starts with a “g” and ends with a “lock”

Important Definitions

Tax Return

The tax form used to report income and file income taxes with the Internal Revenue Service (IRS) in the United States. Tax returns allow you to calculate your tax liability and pay what you owe or request a refund for what you overpaid. Basically, if you were paid money in some form or fashion, the government wants their cut.

Typically, a tax return is divided into three main sections: income, deductions and credits. The return itself is only a few pages long, but depending on the type of income declared or the credits and deductions requested, there can be several “schedules” that need to be added on.

Tax Schedules

The forms the IRS requires you to prepare in addition to your tax return when you have certain types of income or deductions. These forms range from Schedule “A” to Schedule “R”. Schedule “C” will be important, as many ofyou likely have wives who are self-employed. Schedule “E” is also important as many of you probably have rental income from the house you still own from three PCS’s ago.

Tax Brackets

A range of incomes subject to a certain income tax rate. In the U.S. we use a progressive tax system, which means that amount you are taxed increases as your income grows. Low incomes pay low income tax rates, while higher incomes pay higher rates. Currently there are seven federal tax brackets, ranging from 10% to 39.6%, with each varying for single filers, married joint filers, married filing separately filers, and head of household filers.

Income 

Money that an individual or business receives in exchange for providing a good or service or through investing capital (money). In this part of the return, the person preparing it must indicate all forms of taxable income received during the year from all sources.  It is important to note that income is more than just the wages you earn at your job. Generally, if you receive compensation in any form, it’s likely to qualify as taxable income. Prize winnings, dividends, rental income, and capital gains on investments all count. *NOT ALL INCOME IS TAXABLE

Taxable Income

The amount of income used to calculate how much tax an individual or a company owes to the government. It is generally described as gross income or adjusted gross income (which is minus any deductions or exemptions allowed in that tax year).  There are two kinds of taxable income: Earned income (salary, wages, tips, bonuses, commissions, etc.) and unearned income (dividends, interest, rents, alimony, winnings, royalties, etc.). Income earned while deployed is NOT TAXABLE (this is a huge benefit).

Deductions

Expenses you had throughout the year that allow you to lower your taxable income. The more deductions you qualify for, the less tax you pay. Typical examples include contributions to retirement savings plans, alimony paid and loan interest deductions. For businesses (including self-employment), all expenses incurred in order to conduct the business are deductible. The ultimate goal of deductions is to lower your amount of taxable income to a lower tax bracket.

There are 2 main types of tax deductions: the standard deduction and itemized deductions. You must use one or the other, but not both. It is generally recommended that you itemize deductions if their total is greater than the standard deduction. However, in order to itemize deductions, you must be familiar with every deduction you qualify for and keep detailed records with proof. While itemizing typically yields a greater deduction, it is MUCH more complicated.

Credits

Money that is placed directly back into your pocket. If you qualify for the $1000 Child Tax Credit you get $1000 directly subtracted from the tax you owe or directly deposited to you if you owe $0. Your goal as a taxpayer should be to take full advantage of every tax credit and deduction that you qualify for. 

Withholding

The annoying portion of your wages that is not included in your paycheck, but instead paid directly to the federal or state government.

Tax Refunds

A return of excess amounts of income tax that you have paid to the state or federal government throughout the past year because your withholding rate is set too high.

Know your Withholding

Getting thousands of dollars back because you qualify for multiple tax credits and deductions is a great thing.

Getting thousands of dollars back without qualifying for any credits or major deductions is a bad thing.

In other words, when you get a massive tax refund, it might feel like you are getting a gift, but it actually means you’ve loaned the government money from your paychecks all year. And the government is not paying it back with interest!

Lets do some math. Let’s say you are a 19 year old single private with no kids, don’t qualify for any tax credits, and you get $1200 “refunded” to you when you file your tax return. Awesome right!? Wrong! $1200 / 12 means you have been paying an extra $100 in taxes each month. Many people say they don’t have enough money to save for retirement, yet they vastly overpay their taxes each month.

How to keep your money in your own hands

First, you’ll need to change your tax withholding status so that you don’t have extra money sucked out of your paycheck. If you set your withholding rate too low, you will underpay your taxes and owe the IRS money come tax return time. If you set your withholding rate too high, you overpay your taxes and the IRS owes you money. In a perfect world, you’d want to set your withholding rate so that neither of you owe the other money. Of course, in this imperfect world it’s not likely that you’ll get it exactly $0, but it’s definitely possible to come close.

Log-in to your Mypay to adjust your withholding rate.

Common Tax Deductions for Military Tax Return

• Combat Pay Exclusion.  All pay you receive while deployed to a combat zone is tax free.
• Mortgage interest. You’re allowed to deduct interest paid on your primary mortgage, home equity loans, home improvement loans and lines of credit.
• Property Taxes. You’re allowed to deduct state and local property and income taxes
• Charitable gifts. You can deduct all donations to charity such as POW/MIA association, Wounded Warrior Association, Fisher House Foundation, Army Emergency Relief fund, etc.
• Guard and Reserve travel expenses. If you traveled more than 100 miles to attend a drill and spent the night, you can deduct non-reimbursed lodging expenses, half the cost of your meals and 57.5 cents per mile for travel. You also can deduct tolls and parking fees.
• Uniform Deduction.  You can deduct the costs of certain uniforms that you can’t wear while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs. According to the IRS, examples include:
  • Military dress uniforms and utility uniforms that you cannot wear when off duty
  • Articles not replacing regular clothing such as insignia of rank, epaulets, and swords
  • Reservists’ uniforms if they can only be worn while performing reservist duties

• Moving expenses. If you are on active duty and conduct a PCS move, you can deduct un-reimbursed moving expenses related to travel and the cost of moving household goods and personal effects. You also qualify for a moving expense deduction once you are out of the military, if your move is related to the start of a new job in a new location.

Common Tax Credits for Military Tax Return

• Earned Income Tax Credit (EITC). The EITC provides a tax refund to help workers and families with modest incomes. The amount of this tax credit can go up to $6,444! The amount you receive depends on how many children you have and your total taxable income.
  • This is where the Combat Tax Exclusion benefit pays off huge! Easy math: if you make $60,000 per year ($5K per month) and are deployed for 9 months during 2017, your taxable income is only $15,000 (the three months you weren’t deployed). Almost every single-income service member should qualify for a portion of the EITC if they are deployed for a substantial amount of time.
  • The maximum amount of credit for Tax Year 2017 is:
    • $6,318 with three or more qualifying children
    • $5,616 with two qualifying children
    • $3,400 with one qualifying child
    • $510 with no qualifying children
  • The chart below shows the amount of taxable income you must be under with the coinciding amount of children to qualify. For example, if you have three kids and have a taxable income less than $53,930, you will qualify for the EITC up to $6,318.

  

• Child Tax Credit. Bottom line is that the IRS will pay you $1000 for every kid you have. In 2018, that credit will increase to $2000 per kid. Quick, go make more babies!!

via GIPHY

• Child and Dependent Care Tax Credit. The IRS will pay you a credit for reimbursed child care expenses. This credit is designed to encourage taxpayers to pay childcare expenses so that they remain gainfully employed. The maximum credit is $2,100 (based on 2 or more dependents and $6,000 of qualifying expenses).
• Saver’s Tax Credit.  This credit rewards lower-income savers with a tax credit of up to 50% of the amount contributed to retirement savings plans; Thrift Savings Plan included. You qualify if your taxable income is less than $56,500.

I’m Married, should I file Jointly or Separately?

Easy answer, in almost every circumstance, you should choose “Married, filing jointly”.

This question comes up is because many service members believe that if their wife works, their combined income will push the family into a higher tax bracket and therefore the family will owe the IRS more money. “Married Filing Separately” is filing status for married couples who choose to record their respective incomes, exemptions and deductions on separate tax returns.

However, in the majority of cases, “Married Filing Jointly” offers the most tax savings, especially when the spouses have different income levels.

Here’s why:

• Separate filers only receive a standard deduction of $6,350 compared to $12,700 for those who filed jointly.
• Separate filers are automatically disqualified from several of the tax deductions and credits mentioned earlier (such as the EITC, Child Credit, and Child Care Credit).
• Separate filers are usually limited to a smaller Saver’s Credit contribution deduction.
• You cannot take the deduction for student loan interest, or the tuition and fees deduction.

I got a sick refund, what should I do with it?

Honestly, if you could purchase a dirt-track racing, jockey-ready cheetah, then I say go for it! However, if your local Sam’s Club is all sold out of cheetahs, then it’s probably better to spend it in better ways. Use a portion of the money to by yourself something cool, like a Blue Label Single Stack Glock 43 9mm and then use the rest of the money to pay down credit cards, cars, or student loan debt.

That’s it

There is a ton more nitty-gritty details that I purposely did not cover. This article is a starting point and broad catch-all for starting your military tax return. Whether you use the military’s free on-post tax prep, go to your local HR Block, or file your own taxes on-line; you’ll be able to understand the lingo, what goes into filing your tax return, and know what you potentially qualify for.

You’re Welcome