6 Ways the Tax Cuts and Jobs Act Affects Retiring Military OfficersTaxes
The Tax Cuts and Jobs Act (TCJA) has been the law of the land for about 4 years now. It changed the tax code significantly. And those changes affect your transition from active duty to the retired ranks. And, unfortunately, the advice you receive from your mentor that retired 6 or 7 years ago may not be valid. So, what do you need to know?
What Changes Affect Military Retirement?
- Miscellaneous Itemized Deductions Eliminated. The miscellaneous itemized deductions subject to a 2% floor are eliminated. Completely. That means your job hunting expenses are no longer deductible. It also means my fees (or any other investment advisor or tax professional) are no longer deductible.
- State and Local Tax (SALT) Deduction Limitation. A lot of military retirees, especially retired senior officers, pay a lot in state income tax and property taxes. Under the TCJA, you'll only be able to deduct a maximum of $10,000 in SALT.
- Moving Expense Changes. Moving expenses are no longer deductible. Additionally, any moving expenses paid for by your employer are taxable. Now there is a carve out for Active Duty Military members. Fortunately, that carve out allows you to not pay taxes on your retirement move. Any other moves though will be taxable.
- Capital Gains, Kind Of. Capital gains still receive favorable tax treatment. But the thresholds for that treatment are no longer tied to tax brackets, but rather to a dollar amount.
- Itemized Deduction and Exemption Phase Outs. Many of you have or would have had your itemized deductions and exemptions reduced due to the amount of your income. That is no longer the case. On the other hand, there isn't that much left to deduct and there are no longer any exemptions.
- The AMT. When I first looked at the proposed legislation years ago, I said to myself, "They're changing the income tax to the Alternative Minimum Tax." One of the most of the substantive change to the Code was making the income tax rules virtually the same as the AMT (SALT Deductions, Exemptions, Miscellaneous Itemized Deductions). Additionally, the exemption for the AMT was increased significantly, so I suspect that many of you who paid the AMT, will no longer have to pay it.
What Has Stayed the Same for Military Retirees?
- You'll Need to Watch Withholding. There will still be issues with withholding when you start your first job if you don't put some thought into it. Remember, your employer and DFAS (unless you tell them otherwise) will, at a minimum, treat the amount equal to the standard deduction as tax free income when calculating your withholding. In reality, one of them should treat that amount as taxable income, most likely taxable at a rate of 22% or higher. At 22%, you'll under-withhold by about $5,000 and get to write a big check to the IRS when you file. This does assume we're talking the first full year of retirement.
- You'll miss a lot of things. Many credits and deductions will go away. Here are some...
- Rental Losses. The ability to deduct a real estate rental loss phases out between $100,000 and $150,000 Adjusted Gross Income (AGI).
- American Opportunity Credit (AOC). The ability to take the AOC (for college expenses), phases out between $160,000 - $180,000 of AGI
- No Roth IRA. I see this one a lot from retired senior officers. Many of you will lose the ability to contribute to a Roth IRA directly. The phase out for 2022 is $204,000 - $214,000 of AGI for Married Couples and $129,000 - $144,000 for Single taxpayers.
- ObamaCare Surtaxes. The Medicare surtaxes added as a part of ObamaCare are still in effect. You will pay a 0.9% surtax on wages above $250,000 for married taxpayers and $200,000 for single taxpayers. As a reminder, military retirement pension is not considered wages. Additionally, if your AGI exceeds $250,000 married or $200,000 single AND you have investment income, that investment income will be subject to a 3.8% surtax.
Military Finances are Complicated
As you make the transition from Active Duty life to civilian life, many things will change in regards to your finances. And most financial advisors won't understand the unique benefits and complications that veterans and military retirees have. That's why we think you should work with a financial advisor that deals with these issues each and every day. If you'd like to talk about how we do things, use the button below to schedule a free initial consultation.
If you liked this article, you might find the following blog posts useful:
Retired Military Finances 301: Tax Strategies for High Earners
Retired Military Finances 401. Gifting Strategies to Reduce Income Taxes for Married Couples
Retired Military Finances 401: Stretching an Inherited IRA with a CRUT