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Get a Bigger Tax Refund than Expected the Year You Retired from the Military? Thumbnail

Get a Bigger Tax Refund than Expected the Year You Retired from the Military?


A Surprise for Many Retired Senior Military Officers

If you’ve heard me speak, you’ve heard me say that your taxes are going to go way up when you retire.  And…you retired last year, and your refund was actually bigger than you expected.  What gives?  Am I really that far off base?  No, this is the result of a unique quirk in the way Social Security taxes are withheld.

Military and Civilian Employer Withhold Too Much

If you’re a retired Colonel/Captain or higher you probably noticed that your Active-Duty pay went up each December (It really wasn’t a Christmas bonus).  Social Security is only withheld on a portion of your base pay (and none at all on your retirement pay).  For 2021 that amount was $142,800 (It is $147,000 for 2022).  If your total wages were more than $142,800 last year, and you also retired last year you probably had too much Social Security tax withheld. Here is an example…

  • You retired mid-year, last year and your total base pay was $72,000
  • You were hired shortly after that into a $200,000 a year job and your pay from that job was $100,000
  • Your total wages for the year were $172,000
  • Both employers withheld Social Security taxes on all your wages for a total of $10,664
  • The total withholding should have been $8,854
  • You paid $1,810 in excess Social Security taxes and that amount available for paying your income tax due or increasing your refund


Next Year Won’t Be the Same

Assuming you stay in the same civilian job this year, you won’t have the same result.  Your employer will stop withholding Social Security taxes when your wages hit the annual limit. And, if you decided I didn’t know what I was talking about when I said your taxes are going way up, you’re in for a nasty surprise.

Watch Out for This One Too

If your spouse is employed and earning wages (or has self-employment income) it is possible that you could exceed $250,000 in wages for the year and become subject to an additional 0.9% Medicare (ObamaCare) surtax.  Depending on how the wages are distributed, your employer may not take any additional withholding for this tax that you will owe.  Be ready for that.  By the way, the tax still applies if you’re the only wage earner.  It is just that your employer will start the additional withholding when your wages reach $200,000 (even though you need $250,000 in wages to be subject to the tax if you are married).

Taxes Will Surprise You After Retirement

I'm convinced that taxes are the single biggest financial related surprise for retired Senior Military Officers.  You need to really pay attention to your tax situation or get someone to help you....they are your biggest lifetime expense.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 101: How to Estimate Your Future Social Security Benefits

Military Finances 201: Take Social Security Early and Invest It?

Retired Military Finances 101: Taxes

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