Changes and resources for military members

The good news about filing your tax return this year is that it may be a simpler process, according to the Defense Department’s tax counsel.

For example, since there weren’t any economic stimulus checks in 2022, you don’t have to worry about tax rules related to that. And service members don’t need to concern themselves with tax forms they received from the Defense Finance and Accounting Service related to Social Security withholding.

Some benefits, deductions and credits that were available in the past few years because of the pandemic have gone away or reverted back to pre-COVID levels, said Susan Mitchell, DoD tax counsel and executive director of the Armed Forces Tax Council. For example, the child tax credit is lower than it was in 2021, and both the child and dependent care credit and the earned income tax credit revert back to pre-COVID levels.

The basics

The deadline for filing, or to file an extension, and pay your taxes, is Tuesday, April 18. (The 15th falls on a Saturday and Monday the 17th is Emancipation Day in some jurisdictions.) There are also some longstanding tax filing extensions available for certain service members. If stationed outside the U.S. and Puerto Rico, troops can qualify for an automatic two-month extension until June 15, both for filing and paying taxes that are due. This extension is designed to help troops overseas who may have trouble getting all the documents they need.

Those overseas who can’t file by that extension can request an additional extension, until Oct. 16.

Remember that any taxes due must be paid by that April 18 deadline (or the June 15 deadline, if overseas) or you could be subject to both interest charges and a failure-to-pay penalty, Mitchell said.

Special rules apply for service members deployed to a combat zone. The deadline for filing and paying taxes is generally extended for their period of service in the combat zone plus 180 days after their last day in the combat zone.

Earned Income Tax Credit

The EITC applies to eligible low- and moderate-income workers, subject to certain qualifying rules. The credit could reduce the amount of taxes owed and perhaps increase your refund. There are special EITC rules and considerations for military members who receive nontaxable pay such as a housing allowance or who are stationed outside the United States. For more information, visit the IRS page on the EITC for military members.

This credit is phased out at certain income levels and number of dependents. It is completely phased out for married couples filing jointly with an earned income of $59,187 or more with three or more children.

You may qualify for the EITC even if you can’t claim children on your tax return. The minimum age for a childless worker to qualify for the credit reverts back to 25, compared to age 19 in 2021. The maximum age of 65 has also been reinstated, after being eliminated for 2021.

Child and dependent credits

Child tax credit: This credit is lower than it was in 2021, when it received a one-year, temporary bump. Tax credits reduce the amount of taxes you owe, dollar for dollar, which is typically better than a deduction, which reduces the amount of your income that is subject to tax, Mitchell notes.

For tax year 2022, the child tax credit is $2,000 per child age 16 or younger. It’s also subject to phase out as income rises, starting at $400,000 for joint filers and $200,000 for single filers.

Child and dependent care credit: You may be able to claim the child and dependent care credit if you paid for the care of a qualifying individual to enable you — and your spouse, if filing a joint return — to work or actively look for work, according to the IRS. Generally, you may not take this credit if you are married and filing separately. However, see What’s Your Filing Status? in IRS Publication 503, Child and Dependent Care Expenses, which describes exceptions to the rule.

The amount of the credit is a percentage of the amount of you paid to a provider while you worked or looked for work. That percentage depends on your adjusted gross income, but the maximum credit is 35% of your eligible expenses. There are limits, however.

For 2022, you may claim up to $3,000 in expenses if you had one qualifying dependent, or $6,000 if you had two or more. So, when the maximum 35% credit is applied, that puts the top credit at $1,050 for one child; and $2,100 (35% of $6,000) for more than one child. The more you earn, the lower the percentage of employment-related expenses that are allowed. Once your adjusted gross income is over $43,000, the maximum credit is 20% of your employment-related expenses, according to the IRS.

Other notable changes

♦ A number of military spouses are teachers, and the deduction has increased to $300 for out-of-pocket expenses for supplies, books, COVID-19 protective items or other materials. That’s up from $250 in 2021.

♦ The “kiddie tax” takes less of a bite, Mitchell notes. This tax on income-generating assets in a custodial account was enacted to discourage wealthier individuals from transferring assets to their children to take advantage of lower tax rates.

The first $1,150 of a child’s unearned income is tax free for those 18 or younger, or if the child is a full-time student under age 24, up from $1,100 in 2021. The next $1,150 is taxed at the child’s rate. Any excess over $2,300 is taxed at the parent’s rate.

♦ Taxpayers can deduct the cost of operating an automobile for business, charitable, medical or moving expense purposes. Taxpayers may use the optional standard mileage rates, but there are two rates for 2022. For the last six months of 2022, the standard rate for business travel was 62.5 cents per mile, up 4 cents from the rate effective for the first six months of the year. The rate for deductible medical or moving expenses was 22 cents for the last six months of the year, also up 4 cents from the first half.  Unlike most others, military members can take deductions on out-of-pocket moving expenses.

♦ Employers were allowed to provide more tax-free benefits for parking and transportation, up to $280 per month in 2022.

♦ Itemized deductions haven’t changed much. The deduction for state and local income taxes, property taxes, real estate taxes is still capped at $10,000. The home mortgage interest deduction is still limited to $750,000 of mortgage debt.

What’s that form 1099K?

Mitchell highlights a change affecting military spouses and service members who operate a business selling goods or services, which is resulting in questions from the field. Starting with tax year 2022, third-party payment networks, such as PayPal and Venmo, are required to send you a form 1099K if you have been paid more than $600 during the year for goods and services, regardless of the number of transactions. Previously, that 1099K was only sent to those receiving more than $20,000 in gross payments, with more than 200 transactions.

“Any time you receive income, you are reporting that as income. But the 1099K shows you the third party also reported it to the Internal Revenue Service,” Mitchell said. “The 1099K generally is going to show the amount you owe income tax on, that they count as gross income.”

This only applies to goods and services, and doesn’t apply to payments from family and friends, Mitchell said.

State treatment of military retirement income

Some states don’t have an income tax. Other states have decreased or eliminated state taxes on military retirement income.

For example, in 2022, Virginia enacted a law that gradually phases out taxes on military retirement for retirees age 55 and older, up to a cap of $40,000. It starts with tax year 2022, when the first $10,000 of their retirement pay is tax free. By 2024, up to $40,000 of military retirement pay is tax free. Be sure to check out your state’s laws.

Tax issues from toxic-water relief in Hawaii

Civilians, including military retirees, in Hawaii who were affected by the toxic, fuel-tainted water in Hawaii in late 2021 and early 2022 were sent 1099 forms from the Defense Finance and Accounting Service, reporting as income the reimbursements they received from the military.

The Internal Revenue Service announced Wednesday that these civilians won’t have to pay taxes on the reimbursements they received from the Defense Department.

This tax issue didn’t affect currently serving military members and their families, who also received reimbursements.

During the crisis, some people chose to leave their homes while officials worked to flush out the fuel. Others remained in their homes but were instructed not to use or drink the water. They were reimbursed for hotels, meals and, in some cases, personal property damage.

Those haven’t already filed their tax returns should not include those payments in their gross income on their tax returns, IRS officials said in the announcement. Taxpayers who have already filed their 2022 tax returns and included the payments in their gross income should file amended returns using Form 1040-X, Amended U.S. Individual Income Tax Return.

The IRS provided additional instructions for these taxpayers:

• If taxpayers already filed their 2022 tax return electronically and included the reimbursements in their gross income, they should electronically file IRS Form 1040X. Officials said most electronic tax software and tax professionals offer an electronic amended return filing option. The “Explanation of Changes” should begin with “Red Hill Relief” in the electronic form.
• *If the form is filed on paper, mark the top of Form 1040-X with “Red Hill Relief” and begin Part III, “Explanation of Changes,” with “Red Hill Relief.” The paper amended return should be mailed to: Department of the Treasury, Internal Revenue Service / Austin, TX 73301-0052.

Tax help

Because so many twists and turns may apply to military members and their families, including state tax laws, it’s helpful to get free tax preparation assistance. While the tax preparation services through military legal assistance offices on base aren’t as plentiful as they once were, there are still many installations running these services through the Volunteer Income Tax Assistance program, Mitchell said. You can find information about locations at Military OneSource.

Another helpful resource is the MilTax free software that’s provided on the Military OneSource website for currently serving members, to include active duty, Guard and reserve members. Eligibility extends for to 365 days after a service member leaves the military.

A big benefit of the MilTax program are the military tax consultants, who can answer questions by phone or chat, 24/7.

Tips

♦ Using the MilTax software can help avoid math errors, Mitchell said, because the software does those complex calculations and catches any math errors. She suggests printing out a copy of the return to review before submitting it to the IRS. “People can always amend the return later, but it’s certainly simpler getting it right the first time,” she said.

♦ Use the same name on your tax return that’s on your Social Security card. Check and double check your Social Security number.

♦ The fastest and most reliable way to file taxes is to file electronically and choose direct deposit. Make sure your bank account numbers are correct for the direct deposit.

♦ Getting a refund? Check the status of your refund at the IRS web page, “Where’s My Refund?”

♦ Didn’t receive a tax document? Mitchell advises first contacting the employer or issuing agency. If they can’t get a copy, contact the IRS for help, at 800-829-1040. You’ll provide your information, and your employer’s information. The IRS will contact the employer, but will also send you a substitute form to report the information that’s on the missing document. If the employer sends a document later with different information, the taxpayer may need to file an amended return.