facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search brokercheck brokercheck
%POST_TITLE% Thumbnail

Special Tax Break for Junior Military Officers

Taxes Military Pay and Benefits

It's tough saving for retirement.  Especially if you are a young junior officer.  The Congress realized this and established the Retirement Savings Credit to help younger and/or lower income individuals save for retirement.

The Retirement Savings Credit Explained

The Retirement Savings Credit is a credit of up to $2,000 for those who file Married Filing Jointly (MFJ) and $1,000 for all other taxpayers that qualify. The be eligible to claim the credit you must make contributions to a retirement account like an IRA, Roth IRA or TSP.  

To calculate the credit, you multiply up to $4,000 for MFJ or  $2,000 of your retirement plan contributions for all others by a percentage up to 50%, based upon your income.  If filing MFJ, and both spouses contribute to a retirement account then each spouse can claim the credit on up to $4,000 of contributions.  Here is a simplified summary (2018 amounts):

  • The amount of the credit is calculated using Modified Adjusted Gross Income (MAGI)
    •  Married Filing Jointly (MFJ)
      • For maximum credit of $2,000 the MAGI must be less than $38,000
      • For any credit the MAGI must be less than or equal to $62,000
    • Head of Household
      • For maximum credit of $1,000 the MAGI must be less than $28,500
      • For any credit the MAGI must be less than or equal to $47,250
    • All Other Taxpayers
      • For max credit the MAGI must be less than $19,000
      • For any credit and MAGI of $31,500 or less is required

How Does This Affect Military Officers?

If you're single, I don't have a lot of good news for you.  Most likely even as an O-1 with less than 2 years of service, your income will be too high to qualify for the credit.

But, if you're married and you don't receive a lot of special pay, like flight pay, you should be able to get at least some credit until you pin on Captain or Lieutenant (USN).  Pretty good deal.

Remember though that the credit is based on the amount you contribute and to get the greatest benefit you have to contribute $4,000 if married and $2,000 for all others.  To get any credit you have to contribute something.

But Wait!  What If I Deploy to a Combat Zone?

Good thinking.  If you deploy to a combat zone, all or a portion of your pay is subject to the Combat Zone Exclusion.  The good news about this is you still have earned income to qualify for the ability to contribute to a retirement plan but your MAGI could be significantly below the MAGI limit for the credit.  This means field grade and senior officers could qualify for the credit as well.

One word of caution though...the credit can't reduce your tax bill more than the tax you already owe.  There are some credits that are "refundable" and you can actually get a refund that is more than what you had withheld.  The Retirement Savings Credit isn't one of them. So, if you withheld $4,000 and your tax due is $0, since you were deployed to a combat zone you don't qualify for the credit.  Conversely, if you withheld $4,000 and your tax due is $1,000 prior to calculating the credit, your tax due could be reduced to $0.

Military Tax Planning is Complicated

There are literally hundreds of pages of tax code, regulations and court decisions concerning taxation of military members.  Unless you want to spend hours of your time learning them, make sure your financial and tax advisors do it for you.


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.