Tax Planning Updates for Military Families

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Tax Planning for Military Families

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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.

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Today’s SpeakerMichael Gutter, Ph.D. is an Associate Professor, Interim Family and Consumer Sciences State Program Leader, and Financial Management State Specialist for the Department of Family, Youth, and Community Sciences, in the Institute for Food and Agricultural at the University of Florida. His BS is in Family Financial Management and his PhD is in Family Resource Management from The Ohio State University with a specialization in Finance. Gutter currently explores how financial education and financial socialization are related to financial capability. His Extension Programming includes the Florida Master Money Mentor Volunteer Program, Florida Saves, and Fresh$tart Florida. He recently won Outstanding Conference Paper Award for the 2010 Association for Financial Counseling and Planning Education. The common theme that connects Dr. Gutter’s Research, Teaching and Outreach is helping households achieve financial security. His projects focus on enabling access to resources and services as well as improving people’s knowledge and understanding about family resource management. These projects have had funding from the Consumer Federation of America and Bank of America


Dr. Michael S. GutterUniversity of Florida IFAS Extension

@[email protected]

mailto:[email protected]

How Taxes Affect Your Finances1. Understand basic taxes2. Implications for you3. Tax management/reduction strategies

Filing Status• Taxpayers must specify a filing status

for their tax return because different rates are associated with each status.– Single– Married filing joint return– Married filing separate return– Head of household– Qualifying widow(er) with dependent child

2013 IRS Publication 3, Armed Forces’ Tax Guide

Alien Status• Three are three categories of citizenship

for a non-U.S. citizen, or Alien. Each category has a different income reporting and tax form requirement 1. Resident: meet green card test or

substantial presence test for the calendar year• Pay tax on all income, worldwide• Same tax forms as U.S. citizens


Alien Status2. Nonresident: you do not meet the above tests

• File 1040NR or 1040NR-EZ if you have to file• Pay tax on income from U.S. sources

3. Dual-status: you are both a resident and nonresident. Often occurs in years of arrival and departure from U.S. For the part of the year you are a resident alien, you are taxed on all income and for nonresident time you are taxed on income from the U.S.

What information do you need in order to do your taxes?

• W-2– Wages, salaries, taxes withheld including FICA– Contributions to employer-provided qualified plans

• 1099 - Other income• 1099 INT – interest paid• 1099 DIV - dividends• 1099G – certain government payments• 1099 R – distributions from retirement plans• 1099 MISC – self-employment, rental income

• 1098– Payments for mortgage interest paid

Which form to use• Although many of you can use 1040EZ

we will work with the full form 1040 with accompanying schedules

• Generally– 1040EZ TI<50K, no deductions– 1040A TI<50K, no itemized deductions, IRA

ok– 1040 when you need everything

Schedules• Think of as worksheets for specific

situations• Itemized deductions • Interest and dividend income• Small business income• Others• Forms

– For credits, etc.

Let’s look at the math• Basic Steps

– Sum up income sources to get Gross Income– Subtract adjustments to get AGI– Subtract standard deduction or itemized deduction– Subtract personal exemption(s)– Calculate the tax – Subtract credits (if any)– Determine whether you owe or are entitled to a

refund

Basic Tax Calculation Gross income

(-) adjustments to gross income = AGI

(-) itemized or standard deduction (-) Personal exemptions

= Taxable income

Basic Tax CalculationTaxable income is used to determine

Computed tax(-) tax credits + other taxes

= total or net tax due

Gross Income: What is included? [1 of 2]

• Salary, wages, commissions, investment income

• Alimony• Scholarships (above what you paid in fees),

some awards• Pensions, rental income• Gambling winnings, prizes, unemployment• State and local income tax refunds (if you

itemized in the previous year)


Gross Income:What is included? [2 of 2]

• Basic Pay• Special Pay • Bonus Pay • Incentive Pay• Differential wage payments• Settlement payments and interest payments

related to foreclosures– Rules vary based on situation– may be able to exclude some of payment of

interest

Gross Income: What is not included? [1 of 9]

• Child support• Federal income tax refund• Garage sale proceeds• Proceeds from accident and insurance policies• Welfare, food stamps• Income from municipal bonds• Cash rebates• Gifts, inheritances• Disability or workers comp



• Combat zone pay• Defense counseling • Disability payments for injury resulting from

terrorism or military action• Group-term life insurance• State bonus pay for service in combat zone• Survivor and retirement protection plan

premiums• Uniform allowances



• Death allowances– Burial services– Death gratuity payments to eligible survivors– Travel of dependents to burial site

• Family Allowances– Emergencies – Evacuation to place of safety– Certain educational expenses of dependents



• Living Allowances– Basic allowance for housing and subsistence– Overseas housing allowance– Housing and cost of living allowances paid by US

government or foreign government• Moving Allowances

– Dislocation– Military base closure or realignment benefit – Cost of moving household and personal items



• Moving Allowances Continued– Moving trailers or mobile home– Storage– Temporary lodging and related expenses

• Travel Allowances– Annual round trip for dependent students– Leave between consecutive overseas tours



• In-kind Benefits– Medical/dental care– Legal assistance– Dependent-care assistance program– Commissary/exchange discounts

• State Bonus Payments



Combat Zone Pay• Active duty pay for any month in which a

servicemember serves in a combat zone is not taxable

– Can also exclude pay while hospitalized as a result of combat zone related injury or disease

• Pay can be considered in calculation of tax credit– Earned income tax credit (EITC)

Nevaeh was overseas serving in Afghanistan for almost all of 2013, from February 28th to December 31st in 2013. 11 months of her pay would be excluded from her 2013 gross income.



Sale of House• Can exclude up to a certain amount of gain on the sale of a main home from gross income

– In 2013, up to $250,000 single ($500,000 joint)– Must own and live in home for 2 years during a

5 year period• Can suspend 5 year period if on qualified official

extended duty:– At duty station > 50 miles from home, or– Living in Government quarters under

Government orders– Cannot deduct loss



Sale of House Continued Lieutenant Mike Morris and his wife, Carol, moved into

their new home in 2006 that they purchased for $600,000. From 2006 until 2010 they lived in the house. Mike was deployed and Carol decided lived with her family from the beginning of 2011 until the end of 2013. In 2013 Mike returned from duty and they decided to sell the house because they want to move closer to Carol’s family. They sell the house for $850,000. Because they resided in the home for two of the past five years, they are able to exclude the gain from selling their house ($250,000) from their gross income.

Adjustments to Gross Income[1 of 7]

• Adjustments to Gross Income (AGI) used to determine limits on many deductions

• Subtract from gross income– Contributions to qualified retirement plans (tax-

deferred savings)– Contributions to FSA– Student loan interest – Qualified moving expenses


Adjustments to Gross Income [2 of 7]

• Armed Forces Reservists– Reserve member that travels >100 miles in

connection with reserves can deduct unreimbursed travel expenses for the time between leaving home and returning home

– Limited to the amount the federal government generally reimburses its employees for travel expenses


Adjustments to Gross Income [3 of 7]Armed Forces Reservist ContinuedCaptain Harris, a member of the Army Reserve, traveled to a

location 220 miles from his home to perform his work in the reserves in April 2013. He incurred $1,549 of unreimbursed expenses consisting of $249 for mileage (440 miles × 56.5 cents per mile), $300 for meals, and $1,000 for lodging. He also had other deductible mileage expenses of $110 for several trips to a location 20 miles from his home. Only 50% of his meal expenses are deductible. He shows his total deductible travel expenses of $1,509 ($249 + $150 (50% of $300) + $1,000 + $110) on Form 2106, line 10. He enters the $1,399 ($249 + $150 + $1,000) for travel over 100 miles from home on Form 1040, line 24. He then subtracts that $1,399 from the amount on Form 2106, $1,509, and enters $110 on Schedule A (Form 1040), line 21.


Adjustments to Gross Income [4 of 7]• Individual Retirement Arrangements

– Includes service member and spouse (if applicable)– Can deduct the lesser of the:

1. set limit or 2. the contributions made to a traditional IRA that year

– Cannot have been covered by an employer-maintained retirement plan at any point during the year

– Can include combat pay in calculating the contribution limit



• Individual Retirement Arrangements Continued– Qualified Reservist Distribution

• Not subject to 10% penalty tax on early distributions

• Repayment starts 2 years after active duty period ends– Cannot deduct repayments


Adjustments to Gross Income [6 of 7]• Moving Expenses

– Time and distance test OR on active duty with a permanent change of station

– Moving household goods and personal effects and travel

– If a foreign move, can deduct storage costs for time outside US



Moving Expenses ContinuedSargent Ramos is on active duty and is reassigned to Hawaii. She currently is stationed in Arizona. She receives an allowance of $1,000 for the cost of moving her household and personal effects and $200 her temporary lodging. The reassignment costs her $3,000 in moving expenses and $500 in temporary lodging. She can subtract $2,300 from her gross income.

Deductions and Exemptions• These reduce the amount of income that is

subject to tax• Deductions are subtracted from income• Standard deduction:

– Not affected by income– Affected by filing status and age– Marriage penalty: term used to describe the fact that

many two-income married people pay more in taxes than if they were single

2014 Standard DeductionsFiling Status 2014 RateSingle $6,200Head of Household $9,100Married Filing Jointly $12,400Married Filing

Separately$6,200

Deductions and Exemptions• However, if your itemized deductions

exceed the standard deduction than you would use these– These are found on Schedule A

• State and local income taxes• Interest on a mortgage• Medical expenses• Other

Itemized Deductions [1 of 13]• Add total of itemized deductions and compare

against the standard deduction• Itemized Deductions:

• Medical and dental (amount over 7.5% AGI)• phased out, based on AGI

• State, local, property• Mortgage interest, home equity interest• Charitable contributions (cannot exceed 50% AGI)• Casualty and theft (amount over 10% AGI)


Itemized Deductions [2 of 13]• Employee Business Expenses (2% limit)

– Unreimbursed expenses or expenses in excess of reimbursed expenses

– File Form 2106 or Form 2106-EZ– See Publication 463


Itemized Deductions [3 of 13]• Travel Expenses

– Unreimbursed, work related expenses while traveling away from home (at permanent duty station)

• Not permanent duty assignment overseas• Not temporary assignment in a single location (expected to last < 1 yr)

– Cannot deduct meals or lodging at permanent duty station Captain Rodgers travels from the base which he is permanently assigned

to in Georgia to a base in California for temporary assignment. He is reimbursed 50% of the cost for his travel. He can deduct the remaining 50% of his travel costs as an itemized deduction. Travel costs he can include are the lodging in California, 50% of meals while in California, laundry, dry cleaning, and taxicabs.


Itemized Deductions [4 of 13]• Transportation Expenses– Includes

• Getting from one workplace to another when you are not away from home,

• Going to a business meeting away from your regular workplace, and

• Getting from your home to a temporary workplace when you have a regular place of work

– By air, bus, rail, taxi, and personal car


Itemized Deductions [5 of 13]Transportation Expenses ContinuedChief Petty Officer Davis is attending a business meeting that is not on his home base where he usually works. The meeting is off base, 1 hour away, and he drives his own car. He is not reimbursed for his transportation expenses. Davis can deduct the cost of driving to the business meeting from his home base and back to home base after the meeting. But he cannot deduct the cost of driving from home to his home base and back.


Itemized Deductions [6 of 13]• Uniform Cost and Upkeep

– If required and can be worn off duty : cannot deduct uniform cost or upkeep

– If required and cannot be worn off duty: can deduct expenses minus any reimbursements or allowances

• Military battle dress uniforms and utility uniforms• Articles not replacing regular clothing (Insignia of

rank, corps devices, epaulets, aiguillettes, and swords)

• Reservists’ uniforms if only worn while performing reservist duties


Itemized Deductions [7 of 13]Uniform Cost and Upkeep ContinuedReggie purchases a military battle dress uniform that he cannot wear while off duty. He received no allowance to pay for his uniform or reimbursement. Reggie can deduct the cost of his military battle dress uniform.


Itemized Deductions [8 of 13]• Professional Dues

– Unreimbursed dues for professional societies directly related to military position

– Not officers’ club or noncommissioned officers’ club

Lieutenant Margaret Allen, an electrical engineer at Maxwell Air Force Base, can deduct professional dues paid to the American Society of Electrical Engineers.


Itemized Deductions [9 of 13]• Educational Expenses (Pub. 970)

– Unreimbursed and qualifying work-related education

• Required by employer or law to keep salary, status, or job. Education must serve a purpose to employer

• Maintains or improves skills needed for present work– But cannot be education that:

• Is needed to meet minimum requirement for present trade or business or

• Part of study for a new trade or business


Itemized Deductions [10 of 13]• Educational Expenses Continued

– Qualified education can lead to a degree– If qualified education, can deduct costs of

travel including meals up to 50% limit– If qualified education, can deduct

transportation costs for that education (ie actual cost of bus, subway, cab, other fares, or personal car)


Itemized Deductions [11 of 13]Educational Expenses ContinuedLieutenant Colonel Mason has a degree in financial management and is in charge of base finances at her post of duty. She took an advanced finance course. She already meets the minimum qualifications for her job. By taking the course, she is improving skills in her current position. The course does not qualify her for a new trade or business. She can deduct educational expenses that are more than the educational allowance she received.


Itemized Deductions [12 of 13]Educational Expenses ContinuedMajor Williams worked in the military base legal office

as a legal intern. He was placed in excess leave status by his employer to attend law school. He paid all his educational expenses and was not reimbursed. After obtaining his law degree, he passed the state bar exam and worked as a judge advocate. His educational expenses are not deductible because the law degree qualified him for a new trade or business, even though the education maintained and improved his skills in his work.


Itemized Deductions [13 of 13]• Repayments to employer for amount included

in income in an earlier year– If ≤ $3,000 and was reported as wages,

deduct it the year in which the amount was repaid as a misc. itemized deduction

– If > $3,000, see publication 525. Rules vary depending on how was claimed and whether you want a deduction or credit for the value.

Deductions and Exemptions

• Personal Exemptions:– $3,950 (for 2014) for each person who is

supported by the income reported on a tax return

– Usually one exemption each for the filer, the spouse and each dependent child

– Deducted from adjusted gross income to determine taxable income

Taxable Income and Taxes• Taxable income: adjusted gross income

less deductions and exemptions

Tax Rates (ordinary income)• Tax brackets are indexed for inflation• Marginal Tax Rate: tax on the last dollar

earned• Not calculated, just looked up• 10, 15, 25, 28, 33, 35

• Effective or Average Tax Rate– Take tax liability divided by taxable income– Always lower than MTR (except those in 10%)

Tax Rates (ordinary income) [2 of 2]Monica and Gabriel are married and filing jointly.

Their taxable income is $40,500. They would pay 10% of the first $17,850 of their income ($1,785). They would also pay 15% on the remaining $22,650 ($40,500 - $17,850 = $22,650; $22,650 x 15% = $3,397.5). They would add the two tax values: $1,785 + $3,397.5; leaving them with a tax liability of $5,182.50.Taxable

IncomeTax Rate

AppliedAdditional Tax

$0.00 to $17,850 At 10%

$17,850 to $72,500

At 15% Plus $1,785

$72,500 to $146,400

At 25% Plus $9,982.50

What is a credit?• Reduces tax liability, not taxable income• So what is better, a deduction or a credit

– A deduction reduces your tax liability by the MTR

– The credit reduces tax liability dollar for dollar


Earned Income Tax Credit (EITC)• Provides tax credit to lower income working families• Multiply a max amount of earned income by credit %

– There is a schedule that accompanies the form• Earned income

– Employee compensation, net earnings from self-employment– No alimony, pension benefits, or investment income

• As of 2001 IRA excludes nontaxable employee compensation

• Taxpayer need not have a child• Refundable


Child-Related Credits [1 of 2]• Child tax credit

• Based on # of eligible dependent children• Increased credit $600-1,000 between 2001-2010• Phase out when AGI > 110K (75K single)

– Phase out limit depends on # children• Partially refundable

Child-Related Credits [2 of 2]• Child and Dependent Care Expenses

– For specific % of expenses related to working or seeking work

– Home or day care for child or dependent• Child under 13• Dependent or spouse is physically, mentally

incapacitated

Credit for Retirement Account Contributions

• Max contribution $2000 per year• Must be over 18 years old• Dependents and full time students do not qualify• Can be used against regular tax and AMT

• Would be based on contributions to – IRA and Roth IRA– 401K, 403b, 457 plans, Simple and SEP– Credit reduced by distributions from plans

• Income Limit– No credit at all if AGI > $50K (MFJ)– or $37.5K (HOH) or $25K (MFS & S)

Education Credit: American Opportunity

• Formerly the HOPE scholarship credit• Credit for four years of post-secondary education

– 100% of first $2,000 paid + 25% of next $2,000– Max of $2,500 per student– Half-time or more and pursing a degree– For tuition, fees, and course materials– Phase-out: MAGI $160-180K (married); $80K-90K

(single)• 2001 TRA

– Can be used with 529 or Education IRA distributions as long as used for different expenses

2013 IRS Publication 970, Tax Benefits for Education

Education Credit: American Opportunity

•


Education Credit: Lifetime Learning • Credit for an unlimited # of years of post-

secondary education– 20% of expenses paid up to $10,000 – Max of $2,000 per tax return– For tuition, fees, and course materials– Do not have to be pursing a degree– Phase-out: MAGI $107-127K (married); $53K-63K

(single)• 2001 TRA

– Can be used with 529 or Education IRA distributions as long as used for different expenses


Education Credit: Lifetime Learning Bruce and Toni Harper are married and file a joint

tax return. For 2013, their MAGI is $75,000. Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return.


Education Credits• For each student, you cannot claim both

American Opportunity credit and Lifetime Learning credit at the same time– You could claim American Opportunity for one

student and Lifetime Learning for the other– For each student, you could alternate credits.

American Opportunity one year and Lifetime Learning the next

Credit for Excess Social Security Tax Withheld

• Common if you worked for two or more employers and earned more than $117,000, that too much social security tax was withheld

• Max amount of social security tax that should be withheld for 2014 is $7,254 (6.2% of $117,000)

• Can claim the excess over the maximum social security tax as a credit again your income tax

The Big Picture• Taxes affect many savings and

consumption decisions– Buying a home– Using home equity loans for other major

purchases– Absorbing job-related expenses– Investing

• Tax-deferred (401K, 403b, TSP)• Tax-exempt (municipal bond)


Tax Liability Forgiveness• Liability forgiven, or if paid is returned, if

servicemember dies:– In active service in a combat zone– From combat zone injuries– From terrorist or military action wounds or injuries– If work qualified the member for speical military pay for

duty subject to hostile fire or imminent danger Army Private John Kane died in 2013 of wounds

incurred in a terrorist attack in 2012. His income tax liability is forgiven for all tax years from 2011 through 2013.


Filing Returns• Send return to the IRS Center for the state in

which you live. Miguel is stationed in Texas but his

permanent home is in Florida. He should send his return to the IRS Center in Florida

• Returns should be filed by regular due date, April 15th, 2014, unless filing for an extension or if servicemember is serving in a combat zone or is serving overseas.


Automatic Filing Extensions• Extends the due date for the return but

not the timing of tax due. Tax unpaid by April 15th will gain interest

• Depends on where you were located during tax year; in the U.S or abroad – Inside U.S:

• File form 4868 by April 15th or pay part of tax liability by credit or debit card and get an automatic 6 month extension


Automatic Filing Extensions– Outside U.S. and Puerto Rico

• Automatic 2 month extension, don’t have to file 4868 if

– You live outside US/Puerto Rico and post of duty is outside US./Puerto Rico, OR

– As a result of an assigned tour of duty, you were outside the US for a period that includes the entire due date of the return


Extension of Deadlines [1 of 4]• Automatically allows postponement of filing

taxes, payment of taxes, and filing refund claims if servicemember is:– In a combat zone or qualifying service outside of

a combat zone– Part of a contingency operation (deployed outside

of U.S, away from permanent duty station)– Hospitalized outside of the US as a result of

combat or contingency operation injury or hospitalized up to five years in U.S.


Extension of Deadlines [2 of 4]• Deadline extended for 180 days following the later

of:– Last day in combat zone, qualifying service outside of

combat zone, contingency operation, or– Last day of any continuous qualified hospitalization for

injury from service in combat zone or contingency operation

• In addition to the 180 days, the deadline is extended by the number of days left to take action with the IRS when combat zone was entered – Number of days between deployment and the April 15th

deadline


Extension of Deadlines [3 of 4] Petty Officer Leonard Brown's ship entered the Persian Gulf

on January 5, 2012. On February 15, 2012, Petty Officer Brown was injured and was flown to a U.S. hospital. He remained in the hospital through April 21, 2013. The deadlines for filing Petty Officer Brown's 2011, 2012, and 2013 returns are figured as follows. The 2011 tax return. The deadline is January 28, 2014. Petty

Officer Brown has 282 days (180 plus 102) after his last day in the hospital (April 21, 2013) to file his 2011 return. The 102 additional days are the number of days in the 3½ month filing period that were left when he entered the combat zone (January 5– April 15, 2012).


Extension of Deadlines [4 of 4] The 2012 tax return. The deadline is January 31,

2014. Petty Officer Brown has 285 days (180 plus 105) after April 21, 2013, to file his 2012 tax return. The 105 additional days are the number of days in the 2013 filing period that were left when he entered the combat zone (January 1– April 15, 2013).

The 2013 tax return. The deadline is not extended because the 180-day extension period after April 21, 2013, plus the number of days left in the filing period when he entered the combat zone (105) ends on January 31, 2014, which is before the due date for his 2013 return (April 15, 2014).


Signing Returns• Should sign own return unless other

conditions met:– Overseas or Incapacitated

• Grant power of attorney, Form 2848– In combat zone

• Souse can sign, providing a statement explaining the situation

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