facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
3 Mistakes Military Retirees Make on Their Tax Returns Thumbnail

3 Mistakes Military Retirees Make on Their Tax Returns

Taxes

We've been working with Military Retirees on their tax returns for over a decade now. Some returns are pretty easy. Some are pretty complicated. But we almost always see these 3 issues on several tax returns per year.

1. Employed Military Retirees Under-withhold their Federal Taxes

Every year, we have one or two military retirees who are new clients that get the opportunity to mail a 5-figure check to the IRS when they file their return. Not fun. It's because the tax withholding tables are designed for Ozzy and Harriet. They're based on one income families. If you have more than one income source whether that be from your second career after military retirement or your spouse, you're set up to owe a lot your first full year in retirement. That is because your employer and DFAS look at your income in a vacuum and do the withholding based on that income alone. That results in some of your income being under-withheld.

We think the best way to do avoid this problem is to complete a Form 1040-ES after you have at least one Retiree Account Statement (RAS) and a paystub for the year. By completing the 1040-ES you'll know how much you might owe and then you can do additional withholding through DFAS.

2. Employed Military Retirees Making Excess Contributions to a Roth IRA

There is an income limit for contributions to a Roth IRA. If you're a retired Senior Military Officer or NCOs and are working, there is a pretty good chance you're over the limit. If you then make contributions to a Roth IRA, you have excess contributions, and those contributions are subject to an annual excise tax. You can avoid the excise tax if you withdraw the contributions and the earnings on them prior to filing your tax return (extensions included).

In order to avoid this problem, stop Roth IRA contributions at the beginning of the year you retire from the military. If your income ends up under the limit at the end of the year, you can make the contributions. If your income is over the limit, you have other options (like the Back-door Roth Conversion).

3. Military Retirees Don't Withhold State Income Tax

DFAS is not allowed to withhold state income tax from your military retirement unless you direct them to do so. If you don't handle this as part of your retirement out-processing, you're likely to get a big surprise and maybe a penalty for under-withholding when you file your state income tax return.

Unlike when you were working, you don't do a W-4 like form for state withholding. You tell them a dollar amount. If you don't want to spend a lot of time figuring it out, just take the highest tax bracket for your state, multiply it by your taxable retirement pay (SBP "premiums" are excluded from income), and use that number for your withholding. State tax brackets are pretty flat so you won't over-withhold by a large dollar amount and if you do, you can adjust fire in the next year.

If you live in a state without an income tax or one that doesn't tax military pensions, you can skip this one.

Military Finances are Different

There aren't a lot of civilians younger than 60 that have retirement income. So, their financial planners/advisors aren't thinking about retirement income. If you work with a civilian advisor, he or she may not factor in your unique military and veteran benefits when advising you about your money. That's why we think you should work with a financial planner that deals with Active and Retired Senior Military Officers and NCOs every day. If you'd like to find out how we do things, use the button below to schedule a free initial consultation.

Retired Military Finances 301: Is Tax-Free Income in Retirement "All That"


Retired Military Finances 201: I Contributed Too Much to my 401(k). Now What?


The Court has Spoken: The Rumor You Heard About Tax Free Military Retirement Pay is Not True


Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.