The new U.S. tax law is not even a month old, but financial experts say it's not too soon for military service members, veterans and retirees to dig into how the massive policy change will impact their pocketbooks for years to come.
The $1.5 trillion plan installed new tax brackets, benchmarks for deductions and child tax credits, among other changes.
While many people could see a boost in take-home pay this year, and another increase in their tax refunds next year, those gains could diminish over time. Many of the cuts are slated to expire by 2025.
"The good news is some of the deductions that have been removed for the general public are still in place for the military. For example, there were eliminations to moving deductions. However, military members are exempt from this," said Priya Mishra, managing attorney at Top Tax Defenders in Houston. "For the most part, the benefits the rest of the public will see is also reflected for our military. The child care credit, for example, has gone up. So any of our servicemen and women with children will be able to claim more for their children on taxes."
The vast rewrite of the U.S. tax code, the first of its magnitude in more than 30 years, could be a planning headache for taxpayers, including servicemembers. The plan was rushed through Capitol Hill for its Dec. 22 approval, so there's plenty of work facing the Internal Revenue Service, tax experts, financial consultants, businesses and taxpayers to interpret the plan and its impact.
Among the changes, most of the seven income tax brackets will have lower tax rates until 2025. Standard deductions increase, nearly doubling to $24,000 for married couples and to $12,000 for individuals. Child tax credits double to $2,000. Mortgage interest deductions will be capped to loans under $750,000, while state, local and property tax deductions will be capped at $10,000.
In one scenario, a middle-class family of four with an annual income of $70,000 to $80,000 could end up with at least $2,000 in tax relief in take-home pay this year and their tax bill next year.
"The effects are going to play out for a long period of time," said Michael Saunders, deputy legislative director for the Retired Enlisted Association, or TREA, which has been tracking the changes and their impact on military members. "You are looking at a long road to go before we know the full effects."
Military tax exemptions
The tax changes will be vastly similar for service members and veterans.
"For the most part, military members and retirees will see the same benefits and changes due to the tax bill that all Americans will see," said John Cooney, a former Army officer who owns Green and Gold Financial Planning in Middleboro, Mass.
The larger standard deductions could help simplify the tax process at least in that area, experts said.
It "will eliminate the need for a majority of Americans to itemize on their taxes," said Mike Molitoris, an Air Force veteran who works with service members and other veterans through his Flagship Wealth Management Group in Cary, N.C.
The average age of service members is in their 20s, which likely puts them in the lower tax bracket. Changes to those rates will be especially important to watch, experts said. Also, deductions for married couples and family tax credits will also be key. More than half of active-duty military are married, the DOD says, and more than 40 percent of military personnel have children.
"Increasing the child tax credit ... will be beneficial as well" for veterans and service members, Molitoris said.
There are specific wins for service members and veterans in the new tax legislation. Among them: Initial efforts on Capitol Hill to start taxing military personnel for moving costs were thwarted.
"This change was a recognition of the fact that military families are required to move fairly often," Cooney said of the new law's special provision for military members.
Under the plan, a civilian will have to report an employer-paid move as income and pay a tax on that income, while a service member won't. Or, a civilian who covers their own move won't get a tax deduction as they did in the past, while service members will.
"The military was specifically excluded from that," said Jeffrey Kupfer, a tax reform expert and former White House assistant who is an adjunct professor at Carnegie Mellon University's Heinz College in Pittsburgh. For the military, "you can continue to deduct (moving costs) or you don't have to include them in your income." Other wins include the forgiveness of student loans as tax-free -- not taxable income -- for certain disabled veterans.
Most will see savings
The bill will likely reduce the tax burden for all people at least on the front end, unless they are facing specific costs with reduced tax relief, such as higher medical bills or property and state income taxes in locations like California and New York.
"It's very likely that most military service members will see some tax savings under the law," said Forrest Allen, associate director of government relations for the Military Officers Association of America. "It would take some unique financial circumstances for them to see some increase in their tax burden."
For example, service members based in locations with no state income tax might have fewer worries than others in higher-tax states.
"If you are paying taxes in Texas for instance, it won't be much an issue," said Kupfer, who was special assistant for economic policy in the George W. Bush administration. "But if you are paying taxes in New York state, it becomes much more an issue."
High-tax states, however, might be looking at ways to ease the new tax burden, Molitoris said.
"There have been indications from various high-tax states that they may file suit or try to find work-arounds for their constituents to preserve their ability to deduct a higher amount," he said.
The White House has estimated as much as 90 percent of taxpayers could end up with a cut in the beginning, which would apply to military members as well.
"Essentially all service members will end up with a tax cut depending on how much one is paying to begin with," Kupfer said.
The changes could amount to IRS adjustments for take-home pay this year, with service members seeing bigger paychecks in 2018 followed by larger tax refunds next year. Uncertainty on how exactly the law will impact them, when take-home pay changes will kick in this year and how their returns will look in 2019 and beyond means taxpayers need to proceed with caution, experts say.
"We're concerned if the results of the tax change reduce any discretionary income or access to or use of their income," said Dan Merry, vice president of government relations for MOAA. "No one will know the outcome until we get the tax forms. So there's all these decisions. I think the average individual should pay particular attention to their situation."
On Thursday, the U.S. Treasury Department and the IRS issued new withholding guidelines for employers, who must next coordinate the changes in paychecks. Military service members, like civilians, could start seeing larger take-home checks as early as next month. The IRS will be releasing new withholding calculators by the end of February, the agencies said.
Kupfer is betting the tax cuts could get extended.
"From a tax policy standpoint, it's always better to have permanent tax law, it helps with planning and removes uncertainty," he said. "The provisions relating to the reduction of the tax rate or the child tax credit are all things that are going to be around for at least eight years. But if history has shown us anything, there is a decent likelihood they could get extended."
'Save your money'
With the new tax cuts set to expire by 2025, the front-end gains could simply amount to a one-time bonuses, several experts said.
"Rates could go up" after 2025, said Saunders, TREA deputy legislative director. So "save your money. Plan short term for a temporary bonus."
Saunders and Allen, the MOAA associate director, suggest that service members divert this year's extra pay and tax return gains in subsequent years to a retirement fund or savings plan.
"It's almost like a little bonus, but you can't expect to have it forever," Allen said.
Merry said it's critical that service members research the law or visit a reliable financial counselor on their bases or elsewhere. It's also a good time to revisit personal budgets, reassess "needs" versus "wants" and discuss discretionary funding.
An assessment will be especially crucial for people on a tight budget, as they might see a harsher impact from the law in the coming years.
"If they have discretionary income now they may not notice right away, but if they are on a tight budget go to a financial counselor on their base and ask for an assessment of their financial situation," Merry said. "If they are close on their budget they need to take a close look at how it will affect them individually."
Even now, work is underway on Capitol Hill to tweak the tax reform law, or make "technical corrections," Allen said. For example, businesses under the new plan will see the Work Opportunity Tax Credit program, which allows tax credits for employers who hire certain veterans, expire next year.
Saunders said there are efforts to have that plan extended beyond 2019.
Merry said this year's tax filing will be a good test run for changes to come for tax filers.
"They may be able to use the tax filings this year as a springboard as to how their taxes will be impacted next year," he said. "Don't celebrate as you face an unknown -- compare this year's taxes to what the law says about next year."