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Financial Information for Senior Military Officers

Did You Get an Unexpected Tax Refund?

Did You Get an Unexpected Tax Refund?
Often Military Senior Leaders get surprised when they file their tax return the year they retire (or a year they change jobs) and they get a refund.  Why?  Some of you who have heard me speak at an ETAP are really scratching your heads because I told you your taxes were going to go WAY up.  The reason may be your Social Security.  Let's review...

You pay Social Security Taxes (6.2%) on your first $118,500 of income.  If you earn more than $118,500 you don't pay taxes on the excess.  As a reminder, you don't pay Social Security Taxes on Military Retirement Income either.  Like your 401(k) limits, which I talked about last previously, your employer doesn't know how much money you made in the military in the year you retire.  The same holds true if you're changing civilian jobs.  That means, that if you earn more than $118,500 in total but from separate jobs you will have too much Social Security tax withheld.

The number can be significant.  Let's say you earned $90,000 in military pay and then move to a job that pays you $100,000 for the remainder of the year (you start work while you're on terminal leave).  Your total wages for the year are $190,000 and since neither employer paid you more than $118,500 you will have paid too much in Social Security Taxes.  How much?  In this case it would be $4,433.  This excess tax should be reported on Line 71 of your Form 1040.  It will be credited against your income tax owed and if you withheld a sufficient amount to cover your income tax you'll get the money refunded.

So, what is the problem?  I can see two...

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Movin' Back Into Your Rental? Hold on There Partner!

Movin' Back Into Your Rental?  Hold on There Partner!
I think most home owners are aware of the 2 out of 5 rule when it comes to selling your primary residence.  For those who aren't, the rule basically states that if you lived in your house for 2 of the last 5 years (there is an extension for active duty military) you can exclude $500,000/$250,000 (Married/Single) of Capital Gains from your income.  That means no taxes. 

When you look at that you might get the idea that you can move back into your rental house for two years and sell it and not pay taxes.  You'd be wrong on two accounts. 

First of all, you have to pay taxes on any "depreciation recapture" (not the topic of today's article).  You also have to pay taxes on gains attributed to "nonqualified use".

So, what is nonqualified use?  Here is what the IRS says:

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DFAS Announces 2015 Tax Form Delivery Dates

DFAS has announced when Tax Forms will be available at MyPay.  Some are available already...

 

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The Strickland Decision: Part III

The Strickland Decision: Part III

I've written about the Strickland Decision here before. If you missed those articles, you can read them here and here. But, what I haven't talked about is how the IRS statute of limitations rules affect your ability to claim refunds on the taxes that you paid that shouldn't have been paid under Strickland. That's the objective for today. Let's start with a review though...

The Strickland Decision

The Strickland Decision and Internal Revenue Ruling 78-161 give a retired service member the ability/right to adjust military retirement income reported on Form 1099-R. Significant tax benefits will only apply to those who are rated less than 50% disabled or those who receive Combat Related Special Compensation (CRSC). For those rated 50% or more disabled and receiving Concurrent Retirement and Disability Payments (CRDP) the tax benefit is minimal or non-existent due to the phase in of CRDP over the last 7 years.

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Deduct Future Charitable Contributions Now...

Deduct Future Charitable Contributions Now...

Are you sitting on large capital gains from assets you purchased years ago?  Do you normally support charities?  Would you like to reduce your taxes now?  A Donor Advised Fund (DAF), may allow you to solve your capital gains problem, contribute to charity and take charitable deductions while your income is high.  So...what am I talking about?

A DAF is a 503(b) charity normally administered by a brokerage or mutual fund company.  Contributions to a DAF are immediately deductible on your taxes, but the DAF can pay out the assets to charity in the future.  The individual who contributes to the DAF controls (with some limitations) who the DAF pays the assets to and how much is paid each year.  This combination of immediate deduction and delayed payout offers you several options to control your tax bill.

 

Here is how it works.  Let's assume the following:
  1. You have a position in a mutual fund that you've held for more than a year.
  2. You don't want to pay taxes on the large capital gains that you've accumulated
  3. You routinely give to charity and you plan on doing it for the rest of your life or at least for the "long-term"
  4. You are in your high-earning years and you're in the 28% or higher tax bracket and you expect in retirement your tax rate will be lower and you might not even itemize.

Here is what you do:

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Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.

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