This article was originally published in the 2022 1st Quarter edition of Reserve & National Guard Magazine.
Navigating taxes while juggling careers in the military and civilian sector can present challenges, but one Operation Desert Storm veteran who transitioned to the finance industry has provided tips to ease the burden.
Understanding withheld income
Curt Sheldon, a certified financial practitioner and president of C.L. Sheldon and Co., said one of the most important aspects of having more than one source of income is the possibility of underwitholding, or failing to withhold enough income tax throughout the year to completely pay the amount of taxes they owe.
“It is a complicated process which stems from how withholding tables work,” said Sheldon, who served more than 27 years in the Air Force as a fighter pilot.
To prevent this surprise bill when tax season rolls around, Sheldon said to spend time working on W4s to ensure withholdings are adequate. Two IRS resources – the Tax Witholding Estimator and Form 1040-ES – can help determine the right amount of federal income tax to withhold.
“If you discover you will owe money when utilizing either of these resources, you can adjust the numbers so the IRS takes additional money out for the remainder of the year to cover those taxes,” he said. “As a result, you won’t owe those additional dollars when you file.”
Combat zone deployments
Deployments to combat zones, according to Sheldon, are a good time to “pour your combat pay into a Roth IRA and Roth TSP.”
“That tax-free income goes into an account whose growth is not taxed, and is tax-free when you remove it,” he said. “These two accounts are the only of their kind and I highly recommend taking advantage of both of them.”
If possible and financially feasible, one should max out his or her Roth IRA and Roth TSP, according to Sheldon.
“Every individual is in a different financial situation: some are providing for large families, some are paying off debts, and some are single with no expenses,” Sheldon said. “Of course, one should always place providing for their family first. But if you are in a combat zone, it is best to invest and save as much as you possibly can because of the tax-free nature of your income and the Roth IRA.”
Writing off expenses
When writing off expenses as a guardsmen or reservist, Sheldon said troops can file unreimbursed expenses from the time the individual deploys to when he or she returns home – as long as the expenses are within the federal per diem rate.
This includes unreimbursed mileage, food and lodging expenses.
State income-tax awareness
Another pitfall to be aware of is the various state income tax laws if one drills in a different state than one resides in.
“If the state he drills in taxes state income, that soldier’s drill pay will be taxed, and he might not expect that because his civilian income in the other state is not taxed,” Sheldon said.
One client Sheldon worked with lived in Virginia but drilled in Connecticut, and Connecticut taxed his drill pay even though he was a Virginia resident.
“If the state chooses to tax guardsmen or reservists, there is no way around that,” Sheldon said. “Be aware that you may have to file separate returns if that is the case.”
Well-kept retirement secret: IRR 78-161
“A little-known rule” for retirement, according to Sheldon, is that military members who receive a retroactive VA disability less than 50% can amend returns from previous years, reducing taxable income.
“I had a client who did this and his taxes went down 40%,” Sheldon said.
If this is the case, the service member can file Form 1040-X, which is the Amended U.S. Individual Income Tax Return. The individual should write the VA offset that should have been taken out previously under ‘Other Income’ – this will be a negative number. Lastly, they must annotate the negative amount as ‘IRR 78-161’ for reference.
Individuals can learn more by researching Internal Revenue Ruling 78-161 and adjusting the amount reported on Form 1099-R.
For more information or to see when W2s and other tax forms will be made available, visit the Defense Finance and Accounting Service.