facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
6 Ways the Tax Cuts and Jobs Act Affects Retiring Military Officers Thumbnail

6 Ways the Tax Cuts and Jobs Act Affects Retiring Military Officers


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

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. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. 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.