February / March 2012 - Navy
By LCDR Marc J. Soss
This article is meant to assist members of the
active duty and reserve community (including
those serving on active duty) in filing your 2011
Federal Income Tax Return (Form 1040), make
you aware of available tax credits and deductions,
and lower your tax burden.
Preparation of your
2011 Federal Income Tax Return:
Unless you are eligible for an extension, your
2011 Federal Income Tax Return must be filed
with the Internal Revenue Service on or before
April 17, 2011. The following is meant to assist
you in preparation of your 2011 Form 1040
Federal Income Tax Return.
Lines 1-5: Filing Status: The type of taxpayer(s)
that is filing the return: single; married filing
jointly; married filing separate return; head of a
household; or qualifying widow with dependent child.
Line 6: Exemptions: The number of individuals (single,
married couple and dependents) claimed on the return
and information (social security number(s) and relationship
to you) about them. You may deduct $3,700 on line 42 for
each exemption listed in this section.
You may be able to claim a relative on your tax return as a
dependent. You must provide over half the relative’s support.
The supported individual does not have to live in your household
if he or she is your child; a descendant of your child
(such as a grandkid); a brother, stepbrother, half-brother,
sister, stepsister, half-sister, or a descendent of one of these
individuals. The supported individual’s 2011 gross income
may not exceed $3,650 to claim them.
Lines 7-22: Income: Your 2011 income and benefits:
Civilian income: Salary or wages; tips; taxable interest;
capital gains and losses; foreign earned income (exclusion
amount applicable); bonus; back pay; dividend income;
alimony received; deferred compensation; dependent care
benefits provided by your employer; education expenses
reimbursed by your employer; business expense reimbursements;
pensions and annuities; rental real estate income;
royalties; business income; trust income; employer contributions
to medical savings accounts; employer-provided vehicles;
social security benefits; excess salary deferrals; moving
expense reimbursements; severance pay; and
unemployment benefits received (the first
$2,400 is excluded from income).
Military Income: Drill and active duty pay;
special pay (career incentives, language proficiency,
foreign duty, hardship duty, hostile
fire or imminent danger); bonuses (career
status, enlistment, overseas extension, reenlistment,
referral fee); incentive pay (submarine,
flight, hazardous duty, etc.); and retirement
compensation.
Foreign Source Income: Income (earned and
unearned) from sources outside the United
States must be reported unless exempt by U.S.
law. Certain taxpayers can exclude up to
$92,900 of income earned in foreign countries.
Differential Wage Payments: Voluntary payments
made by an employer to an employee while they
are serving on active military duty for more than
thirty days. The wages are subject to income tax withholding,
but not FICA or FUTA taxes, and must be reported by the
employer on the employee’s Form W-2.
Unemployment Compensation: All employment compensation
received in 2011 will count as taxable income.
Required Minimum Distributions: In 2011, taxpayers are
again required to take a “Required Minimum Distribution”
from a traditional IRA or qualified retirement plan.
Conversions to Roth IRAs: There are no modified AGI and
filing status requirements for converting a traditional IRA to a
Roth IRA.
Military Exclusion from Income: Living (Basic Allowance
for Housing, Basic Allowance for Subsistence, housing and
cost-of-living allowances abroad); moving allowances (dislocation,
base realignment and closure benefit paid after Nov. 11,
2003, moving household and personal items, storage, temporary
lodging and associated expenses); travel allowances; Combat
zone pay (limited for officers); family allowances (education
expenses for dependents; emergencies, evacuation to a place
of safety); death allowances (burial services, death gratuity
payments to eligible survivors, travel of dependents to burial
site, counseling); ROTC education and subsistence allowances;
survivor and retirement protection plan premiums; uniform
allowances; in-kind military benefits (dependent-care assistance
program, legal assistance, medical/dental care, commissary/
exchange discounts, space-available travel on government
aircraft).
IMPORTANT NOTE: The states that do not tax retired military
pay are: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas,
Kentucky*, Louisiana, Massachusetts, Michigan, Mississippi*,
Missouri*, Nevada, New Hampshire, New Jersey, New York, North
Carolina*, Ohio, Oregon*, Pennsylvania, South Dakota,
Tennessee, Texas, Washington, Wisconsin and Wyoming. (*with
conditions).
Methods to Reduce Taxable Income:
Retirement Account(s): A member is permitted to participate
in a retirement account.
a. Employer Established Retirement Plans and Thrift
Savings Plan: The elective deferral limits are $16,500. If
you will be 50 years old by December 31, 2011, you may
contribute an additional $5,500 (catch-up contribution).
Service members who contribute to his or her TSP from
his/her basic pay may also contribute from his/her incentive
or special pay (including bonus pay).
b. Individual Retirement Accounts: IRA contributions, to
be deductible, are subject to various limitations (filing status
and “Modified Adjusted Gross Income”). Individuals can also
contribute to an IRA on a non-deductible basis. In addition,
deductible IRA contributions up to $5,000 (plus a $1,000
makeup allowance for those over the age of 50) may be
made for each spouse (including a non-income producing
spouse) as long as the combined compensation of both
spouses at least equals the contributed amount.
c. Defined Contribution Plans: The maximum amount that
can be contributed to a defined contribution plan is 25% of
an employee’s compensation, which is capped at a maximum
of $49,000 (compensation of $245,000).
IMPORTANT NOTES: Every service member is limited to contributing
a maximum of $16,500 to a combination of an Employer
Retirement Account (401K, etc.) and Thrift Savings Plan. Three
states (New Jersey, Massachusetts, and Pennsylvania) do not
allow IRA contributions to be deducted from taxable income.
Capital Gains Tax Planning: Holding investment assets
for more than one year allows a taxpayer to utilize the more
favorable long-term capital gains tax rate structure. The federal
tax rate on most long-term gains are 15% (taxpayers in the
25%, 28%, 33% and 35% tax brackets) and 5% (taxpayers in
the 10% and 15% tax brackets).
Lines 23-37: Adjusted Gross Income. This section consists of
deductions (standard or itemized) to the income and benefits
calculated under lines 7-22 above.
Standard Deduction: The 2011 amounts are: $5,800 for single
or married filing separately; $11,600 for married filing jointly
or qualified widow; and $8,500 for a head of household. There
is no phase out in 2011.
Miscellaneous Itemized Deductions: In 2011, there is no
deduction phase out. The following is a list of the available
deductions and their respective limits, if any:
Itemized Deductions (Not subject to 2% limitation): These
deductions consist of: Educator expense ($250 deduction if
certain qualifications are met); business expenses of a Reservist;
$2,500 maximum student loan interest deduction (subject to
$150,000 if married filing jointly or $75,000 single or head
of household AGI phase out and not available to individuals
who are married and file separately); health savings account
deduction; moving expenses; one-half of self-employment tax;
real estate taxes (even if paid with BAH); self-employed health
insurance deduction; Keogh Retirement Plan; Self-Employed
SEP and SIMPLE contribution deduction; alimony payments;
penalty on early withdrawal of savings; and mortgage interest
paid (even if paid with BAH and subject to limitations).
State and Local Sales Tax: State and local sales taxes are
deductible (actual purchase amount) or pursuant to an IRS
created table. If the IRS table is used the sales tax paid on
automobiles, boats and other items specified by the IRS are
also deductible.
Charitable Contributions: Contributions to a church,
temple, not-for-profit organization, etc., are eligible for
the deduction. Contributions made solely for recreation,
amusement or welfare (MWR) of service personnel are also
deductible. Charities are now required to inform you of the
deduction limits for quid pro quo contributions when you
make a payment of more than $75.00. If you make a gift of
appreciated property, you can receive a tax deduction for
the property’s full market value without having to pay tax
on any appreciation.
Capital Loss Carryover: Up to $3,000 ($1,500 if married
filing separately) of capital losses, in excess of capital gains,
can be deducted as an offset against other income. Capital
losses may also be carried forward to offset a capital gain in
the next year.
Unreimbursed Travel Expense: A Reservist traveling more
than 100 miles away from home in connection with his or
her performance of services as a member of the Reserves
can deduct his/her unreimbursed travel expenses as an
adjustment to income on line 24 rather than as a miscellaneous
itemized deduction. A Reservist required to remain
away from his or her principal place of employment overnight
in performance of authorized drills (IDTs) and training duty
(AT/ADT), may deduct all of the cost of the travel expenses
including meals (subject to 50% limitation) and lodging (if
not furnished), whether or not you are compensated for such
drills and training duty, as long as they are not on per diem.
A Reservist who is unemployed or a student is not entitled
to the mileage deduction.
Exceptions:
The business expense deduction provides eligible Reservists
an above-the-line deduction for their transportation, meals and
lodging expenses (non-reimbursed) incurred when traveling
more than one hundred (100) miles away from home and
staying overnight to attend meetings. The deduction amount
will be calculated at the maximum travel rate expense allowed
for federal government employees. This deduction benefits all
applicable Reservists regardless of whether they itemize on
their income tax returns. To receive the deduction, you must
complete Form 2106, Employee Business Expenses, or Form
2106-EZ, Unreimbursed Employee Business Expenses. Then,
include the amount from Form 2106 or Form 2106-EZ on line
24 of Form 1040. Write “RC” and the amount of expense in the
space to the left of line 24 on Form 1040.
Itemized Deductions (Subject to 7.5% limitation): Medical
expenses must total at least 7.5% (10% if in AMT) of adjusted
gross income (AGI) to be deductible. Deductible expenses
include all unreimbursed medical expenses (doctor, dentist
and chiropractors’ fees; lab fees; contact lenses and eye glasses;
and medical supplies), after-tax dollars spent on insurance
premiums (Medicare Part B and D premiums), co-payments
for drugs and treatments, acupuncture, and medical travel.
Itemized Deductions (Subject to the 2% limitation):
Out-of-Pocket Meals (Reduced by 50%): Officers may deduct
their meals on Form 2106. To deduct the expense, the officer
may either (1) maintain records of each meal purchased; or
(2) utilize the maximum rate authorized paid by the federal
government for meals and incidental expenses in the locality
where the travel was performed.
Uniforms, Uniform Accessories and Maintenance: Members
are allowed to list on Form 2106, all expense pertaining to the
unreimbursed uniform expenses incurred. The expenses include
maintenance, repair or alteration of uniforms and equipment
especially required by the military, which doesn’t take the place
of civilian clothing.
Professional Societies, Subscriptions to Military Related
Periodicals and Purchase of Books: The cost of membership,
subscribing to military related periodicals and the purchase of
books which enhance the training or potential of the member,
are deductible on Form 2106. This includes technical reference
material, historical data, and computer programs detailing the
strategy and tactics of historical battles and language training
materials.
Job Search Expenses: Expenses associated with a job search
(resume preparation, copying, postage, travel to interviews and
long-distance calls) in the same occupation are deductible.
Other Deductible Expenses: The following expenses may also
be deductible: (1) Change of Command or Change of Office,
and Special Award Ceremony expenses (printing, reception,
etc.); and (2) Legal expenses incurred by a member in the
defense of certain allegations. [IRS Publication 529,
Miscellaneous Deductions.]
Additional Civilian Deductions: Home office expense (if your
“principal” place of business); tax return preparation costs; job
search expenses; and educational expenses (if [1] required by
your employer or by law or regulations to retain your salary,
status or job, or [2] to maintain or improve your skills required
in your job).
Lines 38-44. Tax. This section calculates the amount of your
taxable income by deducting your standard or itemized deductions
from your adjusted gross income. It may also be impacted
by the Kiddie Tax (Form 8814). The Kiddie Tax applies to
unearned income, in excess of $900, of a child under age 19 or
24 if a full-time student. The child’s unearned income between
$900 and $1,899 will be taxed at his or her marginal income tax
rate (typically 10%). Income in excess of $1,900 will be taxed
at the parent’s marginal tax rate.
Line 45. Alternative Minimum Tax. The alternative minimum
tax (AMT) is a separately figured tax that eliminates many
deductions and credits, thus increasing tax liability for an
individual who would otherwise pay less tax. The tentative
minimum tax rates on ordinary income are 26%. The 2011
exemption amounts are the following: $74,450 for married
(filing jointly) and surviving spouses; $48,450 for single or
head of household filers; and $37,225 for married (filing separately).
The exemption amounts are subject to being phased
out by an individual’s AMTI. The only deductions that remain
available are for mortgage-interest and charitable donations.
Deductions are lost for state and local income taxes and property
taxes, unreimbursed business expenses, child-tax credits, and
home-equity loan interest.
Lines 47-55. Credits. Foreign tax credit (Form 1116); child care
(child under age 13); dependent care (physically or mentally
incapable of self-care); credit for the elderly or disabled
(Schedule R); and American Opportunity Credit.
Child Tax Credit. $1,000 per qualifying child under age 17.
The credit is phased out for adjusted gross income levels: (1)
$110,000 for joint filers; (2) $55,000 for married individuals
filing separately; and (3) $75,000 for single filers. Under the
phase out rule the credit amount is reduced at the rate of $50
for each $1,000 (or fraction) by which a taxpayer’s modified
adjusted gross income exceeds the threshold amount.
Adoption Credit. A $13,360 credit for each child (a special
needs child receives the full credit regardless of the amount of
expenses). In 2011, the adoption credit is refundable and may
be claimed even if you owe no tax. The credit is phased out for
taxpayers with modified AGI between $185,210 and $225,210.
Mortgage Interest Credit. Home loan mortgage interest is
deductible up to $1 million in home acquisition debt. Home
equity loan interest has a limit ($100,000 or $50,000 if married
filing separately) on the amount of debt that can be treated as
home equity debt (disallowed under AMT). Interest on amounts
up to the home equity debt limit are deductible while amounts
in excess are treated as personal interest and not deductible. In
addition, the interest on excess equity loan amounts used for
investment, business, or other deductible purposes may be
deductible.
Saver’s Credit. A nonrefundable tax credit based on qualified
retirement savings contributions to an employer plan made by
an eligible individual (AGI of $56,500 or less on joint returns,
$42,375 or less on head of household returns, and $28,250
or less on single returns). The credit is equal to the applicable
percentage (based on filing status and AGI) of qualified retirement
savings contributions up to $2,000.
Energy-Saving Improvements. The “residential energyefficient
property credit” equals thirty (30%) percent of the cost
of energy-saving improvements (high-efficiency heating and air
conditioning systems, water heaters, energy-efficient windows,
solar electric systems, solar hot water heaters, geothermal heat
pumps, etc.) with no cap.
New Car Purchases. Taxpayers who purchase a new “qualified
motor vehicle” (car, light truck, motor home or motorcycle)
between February 16, 2009, and December 31, 2011, for less than
$49,500, may deduct the sales and excise taxes. The deduction
phases out between $250,000 and $260,000 of modified adjusted
gross income for married couples and $125,000 and $135,000
for single taxpayers.
Home Buyers Credit. An $8,000 tax credit for qualified
first-time home buyers (buyer who has not owned a primary
residence during the three years up to the date of purchase) for
service members and certain members of the foreign service.
American Opportunity Credit. A $2,500 per student per year
credit for qualified tuition, fees and books paid on behalf of a
student. The credit phases out at $80,000 of adjusted gross
income for single filers ($160,000 for joint filers). The full credit
is also allowed against the alternative minimum tax. The credit
amount should be entered on line 66.
Lines 56-60. Other Taxes. This section includes taxes on the
following: self-employment; tip income not reported to your
employer; IRA or qualified retirement plans (early distribution,
excess contribution, minimum required distribution); non-taxable
combat pay election; home-buyer credit repayment and
household employment.
Line 61. Your Total Tax (addition of lines 55-60).
Lines 62-72. Payments. This section includes: Federal income
tax withheld (W-2 and 1099); estimated tax payments (2011
payments and amounts applied from 2010); earned income
credit (Form EIC); excess social security; medicare, and RRTA
tax withheld; non-taxable combat pay election; additional child
tax credit; and amounts paid with an extension request.
Lines 73-77. Refund or Amount You Owe. This section either
makes the taxpayer happy, if they are due a refund, or a scowl, if
money is owed to the government.
The following are additional factors that must be considered
when completing your 2011 Form 1040 Federal Income Tax
Return.
MILITARY SERVICE IN A COMBAT ZONE AND THE IRS
The following is a short list of tax benefits available to our
brave men and women that served in a combat zone in 2011.
Exclusion from Gross Income. An enlisted member or warrant
officer (including commissioned warrant officers) who performs
service in a combat zone will have his/her military pay excluded
(not included as a part of your W-2 income) from his/her gross
income for all or any part of the month of his/her service in a
combat zone under IRC Section 112(a). For commissioned
officers, the monthly amount that will be excluded from his/her
gross income will be capped at the highest enlisted pay, plus any
hostile fire or imminent danger pay received under IRC Section
112(b). Any income, dividends, interest and bonuses received
from sources other than the military will not be tax exempt.
The combat zone income exemption will apply to the following
members: (1) those serving directly inside a combat zone and
those who participate in operations within the zone, including
the airspace over it; (2) any military pay received by a member
that is hospitalized as a result of injuries sustained while serving
in a combat zone, subject to a two-year limitation. (The two-year
limitation period begins to run on the date of termination of
service in the combat zone.); (3) annual leave payments upon
discharge from the service to the extent the leave was accrued
during any month in any part of which the member served in a
combat zone; and (4) a reenlistment bonus received in a month
that the member is outside the combat zone if they completed
the necessary action for entitlement to the reenlistment bonus in
a month during which they served in the combat zone. In order
to be eligible for the income tax exclusion, your service branch
must certify your entitlement to the military pay exclusion on
your Form W-2.
Federal and State Grants: The federal government and many
states offer returning and retired veterans different types of
grants. The grants come in the form of special monetary compensation
(returning veteran bonus, combat zone grant, property tax
rebate, aid for OIF/OEF veterans, Appreciation Fund, funds to
adapt a residence for disabilities, etc.) or benefits (free college
and university tuition, ad valorem tax relief, small business
grants, etc.). All funds and benefits received from a federal or
state grant program will be tax free to the recipient.
IRS Extensions. The deadline extension provision applies to
most tax actions that are required to be performed on or after the
beginning date for your combat zone, or the date you began serving
in that combat zone, whichever is later. The deadline for performing
certain actions, applicable to your federal taxes, will be
extended for the period of your service in the combat zone plus
180 days thereafter. During the extension period, assessment and
collection deadlines will be extended, and interest and penalties
attributable to the extension period will not be charged. The
extensions will apply without regard to the source of the income.
The deadline extension provisions will also apply for a period of
hospitalization inside the United States not in excess of 5 years.
The IRS deadline extension provisions also apply to individuals
serving in the combat zone in support of the U.S. Armed Forces,
such as merchant marines serving aboard vessels under the
operational control of the Department of Defense, Red Cross
personnel, accredited correspondents, and civilian personnel
acting under the direction of the U.S. Armed Forces in support of
those forces. In addition, members who perform military service
in an area outside the combat zone can qualify for the extension
provisions if their service is in direct support of military operations
in the combat zone, and they receive special pay for duty
subject to hostile fire or imminent danger as certified by the
Department of Defense. The deadline extension provisions
apply to both spouses whether joint or separate tax returns are
filed.
The deadline extension provisions apply only to federal,
estate and gift tax returns. Federal tax and information returns,
such as corporate income tax or employment taxes, are not
entitled to the extension provisions. The extension provisions
will also suspend compliance actions, such as audits or enforced
collections.
Qualified Retirement Contribution. Qualification for an
extension will entitle a service member to make a timely
qualified retirement contribution for the prior tax year to his/
her retirement account on or before the extended deadline
for filing the income tax return for that year. Any amount
contributed to an IRA that is more than the smaller of (1) your
taxable compensation or (2) $5,000 ($6,000 if you are age 50
or over) is an excess contribution and must be withdrawn to
avoid the excise tax. If your taxable compensation will be
less than $5,000 ($6,000 if you are age 50 or over), you should
withdraw the portion of your contribution that exceeds your
taxable compensation.
Estimated Tax Payments: The deadline extension provisions
apply to estimated tax payments and will prevent penalties and
interest from accruing if the tax is paid in full by the extended
filing due date. In order to insure this protection, it is recommended
that you print “COMBAT ZONE” across the top of the
return.
Installment Payment Plans: While serving in a combat
zone and for 180 days thereafter, a service member will not be
required to make payments on past due taxes. Also, no additional
penalties or interest will be charged during this extension
period. In order to receive this benefit, you will need to contact
the IRS office where you were making the payments.
Form W-2, Wage and Tax Statement. Military pay attributable
to service in a combat zone is not reported on a service
member’s Form W-2 in the box marked “Wages, tips, other
compensation.” The military pay will be subject to social
security and Medicare taxes and will be reported under “Social
security wages” and “Medicare wages and tips.”
Earned Income Tax Credit (EITC). The U.S. Tax Code does
not include combat pay, Basic Allowance for Housing (BAH)
and Basic Allowance for Subsistence (BAS) in the definition of
“earned income” for purposes of the EITC. These exclusions
may leave a taxpayer with no earned income and the inability to
claim the credit. The credit amounts are: $3,094 if you have one
qualifying child; $5,112 if you have two qualifying children;
$5,751 if you have three or more qualifying children; or $464 if
you do not have a qualifying child. The credit phases out at:
$43,998 ($49,078 if married filing jointly) if you have three or
more qualifying children; $40,964 ($46,044 if married filing
jointly) if you have two qualifying children; $36,052 ($41,132
if married filing jointly) if you have one qualifying child; or
$13,660 ($18,740 if married filing jointly) if you do not have a
qualifying child.
Hospitalization. The deadline extension provisions will
apply to an injury sustained in a combat zone for the period
that you are continuously hospitalized as follows: (1) outside
of the United States including 180 days thereafter; or (2) not in
excess of five years inside the United States. Also, subject to a
two-year limitation after the end of hostilities and recession
of the combat zone designation, military pay received by a
hospitalized enlisted member as a result of injuries sustained
while serving in a combat zone will be excluded from gross
income. Commissioned officers are entitled to the same benefit
subject to the maximum enlisted per month amount discussed
above. The exclusion will only apply to income taxes and not
FICA taxes. No interest or penalties will be assessed during this
period.
Dependent Children Tax Returns. No income tax return is
required to be filed for a dependent child while one or more
spouses serves in a combat zone. The service member’s extension
to file his/her federal individual income tax return will apply.
Accrued Annual Leave. Combat zone leave payments will be
excluded from gross income (subject to the maximum enlisted
pay limitation). The exclusion will also apply when a service
member sells back his/her leave upon separation from the
military or active duty.
Reenlistment Bonus. A reenlistment bonus earned as a
direct result of the completion of actions necessary for its
entitlement in a combat zone will be excluded from gross
income. The exclusion will apply even if the bonus is received
while outside the combat zone.
MILITARY TAX DEFERRAL
The Servicemembers Civil Relief Act allows Reservists called
to active duty a deferral of taxes owed if they can show that
their ability to pay the taxes was affected by their military
service. The deferral applies to taxes that fall due before or
during military service, and extends the payment deadline to
six months (180 days) after the military service ends. No interest
or penalty will accrue during the deferral period.
Service members on duty outside the U.S. or Puerto Rico,
but not serving in a combat zone, have until June 15 to file their
taxes. Interest will accrue from the 2012 due date (April 17)
until the time of payment.
COMBAT ZONE TAX FORGIVENESS
Federal income tax will be forgiven for the tax year in which
a service member dies while serving in a combat zone or from
wounds, disease, or injury sustained in a combat zone. The
forgiveness will apply to taxes owed in the current year and for
any earlier tax year ending on or after the first day the member
served in the combat zone. Any tax liability that has been paid
and is to be forgiven will also be refunded.
ADDITIONAL MILITARY TAX BENEFITS
Homeowners. Service members forced to sell a residence, due to
being redeployed, will receive a tax break on any capital gains tax they
may incur as a result of failing to meet the two-out-of-five-year requirement.
Housing assistance provided to service members, to compensate
for a decrease in a residence’s value due to a base closure or restructuring,
will also no longer constitute taxable income.
Early Retirement Account Withdrawals. Service members who are
called to active duty for at least 180 days and experience financial difficulties
are allowed to make penalty-free withdrawals from an IRA,
401(k) and similar tax-advantaged plans. The member will have two
years, after the end of their period of military service, to repay the distribution
to avoid income tax and the ten percent early withdrawal penalty.
Military Spouses Residency Relief Act. The law amends the
“Servicemembers Civil Relief Act” to allow both a service member and
his or her spouse to maintain their original state of residency every time
they move. The benefit will prevent a military spouse from having to file
a separate state income tax return.