With tax season in full swing, you should take note of the many deductions and credits available to you because of your military service; whether on active duty or on reserve. Knowing where to look for both new and existing tax benefits may help you obtain a bigger refund or help minimize your tax debt, keeping more money in your pockets. Here are a few tax considerations that may be applicable to you:
- If you are a servicemember and a student, make sure you make the most of education-related deductions. For example, not many people are aware that the interest paid on student loans may be deductible. Document Form 1098-E is mailed to students from loan providers noting the total annual student loan interest paid. Be sure to bring this form with you when you meet with your tax preparer, and if you have yet to receive the form, contact your loan provider.
- Other education benefits include the Lifetime Learning credit (up to $2,000) and the Hope credit, which offers filers up to $1,650 for each eligible student for a period of two tax years.
- Also, as part of tax changes passed in late 2006, the Tuition and Fees deduction has been extended for 2006 and 2007 tax years, providing an opportunity for a deduction of up to $4,000 in tuition and fees paid on a 2006 tax return.
- When you filed your taxes last year, did you owe an additional tax to your state of record or locality? If so, those taxes are deductible on this year's tax return? specifically if you itemize your deductions instead of taking the standard deduction. And, thanks again to the passing of late-breaking tax rules in 2006, if you itemize, you continue to have a choice between deducting your state and local income taxes paid or your state and local sales taxes. If you splurged on a car, boat or another "large ticket" item, you may want to consider deducting the sales tax. And now that you own that new item, remember to look into deducting the personal property taxes paid on it.
- Relocating in 2006 may have also positioned you for tax savings. It is important to keep in mind that any moving expenses not covered by the government may be deductible as an adjustment to income. Also, if you donated personal items that were in "good" or better condition to a qualified charity, you can deduct the fair market value of the items donated as non-cash charitable contributions.
- If you moved overseas, there are additional considerations. If you paid taxes to a foreign government, such as on your investments, they may be deductible. And, if your spouse lived with you overseas and earned income from a job, taxes paid on that income to a foreign government may also be deductible.
- The cost of uniforms (and their maintenance) is generally deductible if your base restricts wearing them when off-duty, and if these costs exceed your uniform allowance. The cost of epaulets and accoutrements, if required as part of a uniform, are also deductible.
- Even though medical expenses are generally covered by the military, any out-of-pocket expenses or miles driven for medical care are deductible expenses if you itemize. The deduction begins when your expenses exceed 7.5 percent of your adjusted gross income (AGI). Additional medical deductions you may not be aware of include mileage driven to doctor appointments or hospitals, parking fees, tolls, or costs of alternate forms of transportation, such as taxicabs or buses used to reach a medical facility.
And finally, don't forget that reservists who were called to active duty any time after Sept. 11, 2001 and served at least 180 days since then are allowed to withdraw funds from an individual retirement account (IRA), 401(k) or other personal retirement plans without paying the 10 percent early withdrawal penalty. This money is not subject to taxes if it's repaid back into the retirement plan in a proper time frame; currently within two years after the completion of active duty.
The new Heroes Earned Retirement Opportunities (HERO) Act contains the provision that non-taxable combat pay may now be recognized as earned income for IRA purposes. This means that military men and women serving in combat zones can continue making contributions to their IRAs, up to a limit of the lesser of $4,000 ($5,000 if age 50 or older) or the individual's total earned income for the year.
For more information on tax credits and deductions that may help your tax situation, talk to a tax preparer. Jackson Hewitt Tax Service has more than 6,500 locations around the country. You can locate the nearest office by dialing 1-800-234-1040 or going to www.jacksonhewitt.com.
With tax season in full swing, you should take note of the many deductions and credits available to you because of your military service; whether on active duty or on reserve. Knowing where to loo... more.