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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...

  1. I don't like to make an interest free loan to Uncle Sam.  If this situation applies to you, you might want to adjust your withholding to account for the extra Social Security Taxes
  2. You could get lulled into a false sense of security.  Getting a refund or not owing what you expected, could lead you to believe that you've got your withholding set for the first full year in retirement.  Probably not...

Your Income Taxes can become quite complex after you retire.  It really is a three-dimensional chess game.  The key to taxes is planning.  Once the year ends, for all practical purposes your tax return is completed.  You just have to fill in the blanks.  If you need some help with planning your taxes or the rest of your financial life give us a call.

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