Tax Tips for Troops and Families: Overview


The well known, but little discussed (inside sports circles) season between the Super Bowl and Baseball Opening Day is here -- Tax Season.

Across the country, W-2s, 1099s, Mortgage Interest Statements, and myriad other documents are filling mailboxes to provide all the documentation necessary to file personal income to the IRS so that taxes through the year accurately reflect what each household was assessed.

Tax season doesn’t typically carry the same fan base, because even if a household is receiving a refund, the time involved in filing preparation can be daunting.

This article series will examine some terms and definitions, discuss how adjusted gross income, taxable income, tax liabilities and credits are determined, provide tips in each of those areas, and cover strategies for reducing your taxes. It is designed to provide a general framework, and explore common tax issues current and former military members encounter, but will not serve as legal basis for unique tax situations.

Whether you decide to do your own tax preparation or have a vetted tax preparer do the work, organizing your tax information beforehand is a strong start to an accurate filing.

Table 1 shows how taxable income and taxes owed are determined. One organizing idea is to build a tax binder that reflects the order by which taxable income and taxes owed are determined. Dividing tax statements into categories of Income, Adjustments, Deductions/Expenses, Credits, and Taxes not only helps in making information readily available for you or whoever prepares your taxes, but can also help you deduce if there is missing information from any reporting source; it also serves as an organized record that can survive PCS moves or be scanned into an electronic folder for future reference in the event of an IRS audit.

TABLE 1 : Tax Determination Overview

Gross Income -     Gross Income Exclusions

  1. Above the Line Income Deductions (Adjustments)

Adjusted Gross Income (AGI)

  1. Below the Line Deductions

Taxable Income (Apply Ordinary / Capital Gains Tax Rates) Tax Liability

  1. Tax Credits

Tax Owed

The first step in your tax return is determining gross income -- all income from all sources, minus allowable exclusions. Some common sources of income affecting the audience are listed in W-2s (Line 1); State and Local Tax Refunds from the previous year (refunds are adjustments to paid state and local taxes the previous year that reduced federal tax liability); Investment Interest and Dividend Income (1099-INT / 1099-DIV); Rental Income (Schedule E); Mutual Fund and Stock Sales (1099B); IRA and Pension Income (1099R); and Social Security Income.

Gross Income Exclusions may be defined as an item of income that is not required to be included in gross income pursuant to a specific provision of income tax law.*  Examples include gifts of money and property (though subsequent income generated from that property is not included), inheritance, interest on some state and local bonds, and interest from educational savings bonds if used for higher education expenses.

Deductions that are allowable to determine the Adjusted Gross Income (AGI) are known as Above the Line Deductions or adjustments. Thrift Savings Plan, 401K contributions, Traditional IRA (within income limits) contributions, student loan interest, and higher education annual statements fall in this category. Another example that can be of benefit to military members is deductions attributable to rental properties such as the mortgage payment, interest, property management fees, etc. for a house owned in 2013, but which did not serve as your primary residence.

Adjusted Gross Income, defined as Gross Income minus all the allowable above the line deductions, is the income reported to the IRS. Below the line deductions will further reduce your tax bill, but will not change your AGI. Taxable Income is the difference between AGI and Below the Line Deductions. Tax Credits applied can further reduce the tax owed. The difference between the tax owed and taxes already paid throughout the year from payroll deductions is what becomes either a refund or an additional amount paid to the IRS when taxes are filed.

A recent NBC News article cited that only three states (California, Maryland, and Oregon) outline certification requirements for non-Certified Public Accountants (CPA) or Tax Attorney tax preparers. Use of a CPA or tax attorney are typically for more complex situations; however, should you decide to have your taxes prepared by a third party not carrying those designations, shop carefully and ask your tax preparer about education and certifications. As any leader in the military will attest, it may be someone else who does the actual work, but your signature on 1040 IRS Tax Filing is an acknowledgement that a review took place and the report is accurate.

*Fundamentals of Income Taxation, Tenth Edition, Christopher P Woehrle and Thomas M. Brinker, The American College Press 2011.

-- Todd Severance is a 1992 graduate of the U.S. Naval Academy with an MBA from the University of Arizona. He is a naval officer (Selected Reserve) with nearly 15 years active-duty experience. Todd is pursuing his Certified Financial Planner and is a business consultant with Echelon Group in Boise, Idaho.

Echelon Group provides Employee Benefits, Retirement Plans, Investment Management; Financial Planning and additional services to companies, its employees, and individuals.

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