Coming back into the general population after serving in the Military can be a very difficult transition. In fact, for many of us that never served in the military, we can’t imagine the stress and challenges.
With that said, and after a heartfelt thanks for your tremendous service on our behalf, we wanted to offer a few potential tax strategies that might make your transition a little smoother…at least on your tax return.
Strategy #1: Pension payments are typically taxable, disability benefits are not
The first thing to know is that pension payments received after retirement from the military are taxable and should be reported on your tax returns. If you also receive disability benefits from the Department of Veterans Affairs, you do NOT need to report these disability benefits on your personal income tax returns. Disability benefits may include the following items:
- Disability compensation and pension payments for disabilities paid either to Veterans or their families,
- Grants for homes designed for wheelchair living,
- Grants for motor vehicles for Veterans who lost their sight or the use of their limbs, or
- Benefits under a dependent-care assistance program.
In some cases, the VA may determine retroactively that you were entitled to additional disability benefits. Since you have already reported these amounts as taxable pension amounts in prior years, reclassifying certain taxable pension payments as non-taxable disability payments would reduce your taxable income in those prior years. You may consider amending previous tax returns reclassifying the amounts based on the VA directive, and apply for an income tax refund. Consult with your tax advisor for assistance in doing this.
Strategy #2: Tell your potential employers about “WOTC”
The federal Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers who hire veterans and individuals from other eligible target groups with employment barriers. Not only are veterans excellent job candidates, but veterans who have service-connected disabilities, are unemployed for at least four weeks, or are receiving SNAP (food stamp) benefits are also eligible to help their employers through the WOTC.
If you are a veteran that is looking for work and if you fall into one or more of these categories, tell your employer that they may consider taking advantage of these generous tax credits once you are hired. The credit can vary from $2,400 to $9,600 (dollar for dollar tax reductions) depending on your circumstances. This can help reduce costs to get you training for your new position. The credit requires the employer to prepare certain paper work at or around the time the job offer is made, so they need to be on top things early. Help them by introducing the idea of this credit in the interview process so that they can appropriately take advantage of it.
Strategy #3: Be aware of federal tax credits that may be available to you
Many of these federal credits apply to all U.S. citizens are also available for both active-duty members of the Armed Forces as well as military veterans. Various state tax credits can also help, so consult with your preferred tax advisor for more information. Keep in mind that tax credits are dollar for dollar reductions in your tax liabilities:
- Child Tax Credit: The child tax credit is a credit that may reduce your tax by as much as $1,000 for each of your qualifying children.
- Additional Child Tax Credit: This may be available if you are not able to claim the full amount of the child tax credit.
- Earned Income Credit (EIC): This tax credit is available to certain US citizens or resident aliens that have earned income and an adjusted gross income (AGI) below certain dollar thresholds. It is a refundable credit—in other words, it is a tax credit that can offset your taxes due PLUS provide additional amounts to maximize your federal refund.
- American Opportunity Credit: This tax credit is for qualified education expenses paid for an eligible student for the first four years of higher education. It is a great way to help you pay for the costs of higher education. You can get a maximum annual credit of $2,500 per eligible student. A portion of the tax credit is refundable like the EIC. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
Strategy #4: Tax Advantages to Relocating
If you end up needing to move while a member of the Armed Forces or when your service is done, there may be some important tax strategies to consider.
First, your moving expenses may be deductible! If you are a member of the Armed Forces, you can deduct certain reasonable moving expenses if you move because of a permanent change in station. If you move for a new job that is at least 50 miles farther than your previous employer from your home and if you work full-time for at least 39 weeks after the move, you may be entitled to a deduction for moving expenses. This deduction includes reasonable expenses to transport your personal belongings and household items to your new home as well as travel costs for you and your family. Inform your tax advisor in advance of moving for specifics of what you should track to claim this deduction.
Second, the sale of your personal residence may qualify to be totally tax free! This is probably one of the greatest gifts from Congress in the entire Internal Revenue Code. Here are the tests:
- You owned the home and used it as your main home during at least two of the last five years before the date of the sale.
- You didn’t acquire the home through a like-kind exchange (known as a “1031 exchange) for at least the past five years.
- You haven’t claimed any exclusion for the sale of a home that occurred during a two-year period prior to the date of the sale of your home.
If you satisfy these tests, you may be eligible to exclude from taxation (“exclude” means to NEVER pay taxes on it) up to $250,000 of gain ($500,000 of gain if married filing jointly)! Not only does this provision apply for federal income taxes but states generally conform to this provision as well, which means that not only can you avoid paying federal income taxes, you likely can avoid paying state income taxes as well. Your tax advisor will probably know this rule, but it never hurts to bring it up as you meet with him or her.
Strategy #5: Know what resources exist to help you
Beyond just tax strategies, consider these resources if you find you need some additional help guidance or assistance with further education or employment:
- Visit the VA Benefits website: The U.S. Department of Veterans Affairs maintains a website that provides a host of ideas and benefits ranging from education and training to loan information, employment services to health care benefits. Please take advantage of this website and its content. You can visit it at http://benefits.va.gov/.
- Veterans may find that they are in need of legal assistance with their homes, child support issues, or past warrants or fines. Legal help may be available for reduced costs or even for free. Visit statesidelegal.org to learn more.
- Consider the GI bill if you’re going back to school. There are different types, so it is important to do your homework here. The key idea is that there is money set aside to help you further your education to make the transition back to civilian life a little easier. Visit http://benefits.va.gov/gibill/ for more information.
Bonus Strategy: Start your small business!
We included this strategy in our guide for active-duty military personnel, but it may be even more applicable to our proud U.S. military veterans! One of the best tax strategies in America is the opportunity to have a small business. Consider starting something on the side NOW!! This could be an online business you start on the web as you pursue a college education or it could be simply investing in a rental property where you have family or have served on a base.
A small business will give you an extra source of income and tax deductions related to starting the business (including but not limited to travel, dining, entertainment, computers, supplies, equipment and auto…just to name a few). Most importantly, it can give you some focus and direction for what your plans may be while you are looking for a certain career or in school. Why not build your own business, develop necessary skills that you can enhance your resume with, and then go out and pursue your dreams!
Keep your eyes open. No idea is a bad one. If you don’t know where to start, consider Mark Kohler’s 8 Steps to Start and Grow your Business. It’s an affordable workbook and series of videos to walk you through the steps to build your Business Plan, Marketing Plan and Strategic Plan to get it off the ground.
Once again—THANK YOU! Thank you for being willing to share your time, talents, and maybe even putting your life on the line to protect our great country and the freedoms that we cherish. We love and respect you for your service. Wherever you find yourself on life’s great journey, let us assist you with anything you may need. God bless you, your family, and this great nation!
Cassidy Carter is a Tax Manager and Certified Public Accountant (CPA) at the home office of Kohler & Eyre CPAs, LLP. Cassidy’s practice areas include small business and individual tax planning with an emphasis on entrepreneurship and real estate. Cassidy previously worked in the tax department at Deloitte in Las Vegas, Nevada, and is currently married with 4 children living in Cedar City, Utah.