Military Veterans often face changing financial situations, from untaxed benefits and combat zone tax exclusions to special bonuses and, finally, the transition to retirement or a civilian career. As a result, taxes from one year to the next can look drastically different and Veterans should be proactive with their tax planning. Here are six essential tax moves for veterans to consider in 2025.
1. Regularly Update Tax Projections
Tax liabilities can fluctuate based on changes in taxable income, household status, and spouse employment or small business earnings. Staying proactive with tax projections helps avoid surprises and enables strategic financial planning. Many tax moves must be completed during a given calendar year and accurate tax projections are essential information to make decisions. A common mistake for veterans is withholding far too little or far too much from their paycheck for taxes. This can result in overly large tax refunds or tax payments that break the budget at tax filing time.
Why It Matters:
- Prevents penalties for underpayment of estimated taxes.
- Identifies if paycheck tax withholding is insufficient.
- Improves budgeting and cash flow management.
- Facilitates informed decisions about major expenses or investments.
- Enables informed decision-making.
Action Step: Develop tax projections for the year and update them whenever you experience major changes in taxable income. I generally develop these tax projections twice per year for clients, once in May and once in November or December`.
2. Switch Pre-Tax TSP Contributions to Roth Contributions if You Earn a Combat Zone Tax Exclusion
If you’re earning a combat zone tax exclusion for part of the year, switching your Thrift Savings Plan (TSP) contributions to Roth can be an effective move. The reduction in taxable income due to the deployment will likely decrease your marginal tax rate for the year, making pre-tax contributions less effective. Contributions made to a Roth TSP while in a combat zone grow tax-free and are withdrawn tax-free in retirement.
Why It Matters:
- Maximizes the tax-free growth potential of your combat zone income.
- Ensures you benefit fully from the unique tax advantages of the exclusion.
- Provides long-term savings flexibility and tax diversification.
Action Step: If you have a scheduled deployment to a combat zone or are in a combat zone, change your TSP contributions to Roth contributions.
3. Switch to Pre-Tax TSP Contributions if You Are Expecting a Retention Bonus
If you’re anticipating a retention bonus in 2025, you may move into a higher tax bracket for the year. Switching to pre-tax contributions in your Thrift Savings Plan (TSP) can help you earn tax deductions at the temporarily higher marginal tax rate.
Why It Matters:
- Reduces your taxable income in the year you receive the bonus.
- Maximizes the immediate financial impact of the retention bonus.
- Gives you the opportunity to convert these contributions to Roth status at a lower tax rate in the future.
Action Step: Login to the TSP website and switch Roth contributions to Pre-tax/traditional. Ensure the pre-tax contributions align with your income projections and overall retirement strategy.
4. Take Advantage of Roth IRA Opportunities
Roth IRAs provide tax-free growth and withdrawals in retirement, making them a valuable option for veterans who meet income eligibility requirements. Additionally, contributions to Roth IRAs can be withdrawn at any time without taxes or penalties. Again, that applies to contributions only. This benefit is unique to Roth IRAs and means that contributions are not “locked up.” Contributions for 2024 can be made until April 2025, offering additional flexibility.
If you are regularly contributing to a traditional IRA, check the rules on the deductibility of those contributions. Often, veterans with access to TSP or another 401K may find that they earn too much income to receive a tax deduction for traditional IRA contributions.
Key Details:
- Income Limits for 2025: Single filers earning up to $150,000 can make full contributions, with a phase-out up to $165,000. Married filers’ phase-out range is $236,000 to $246,000.
- Earned Income Requirement: To contribute to a Roth IRA, at least one spouse must have earned income for the year, such as wages, salaries, or self-employment income. This rule allows both spouses to contribute, even if one has no earnings, provided the total earned income meets the contribution limits.
- 2024 Contribution Deadline: April 15, 2025.
- 2025 Contribution Deadline: April 15, 2026.
Action Step: Determine your eligibility and contribute to a Roth IRA. If your income exceeds the limits, explore a backdoor Roth IRA contribution. If you need to make a backdoor Roth contribution, work with a financial planner or tax adviser to ensure you don’t run into any tax surprises.
5. Utilize Tax Loss Harvesting
If you have investments in taxable brokerage accounts, tax-loss harvesting can offset capital gains and reduce taxable income.
Why It Matters:
- Offset capital gains realized during the calendar year.
- If realized capital losses exceed realized capital gains, you can reduce your other taxable income by up to $3,000 per calendar year.
- Net losses beyond $3,000 can be carried forward into future years.
Action Step: Review your portfolio before year-end. Identify opportunities to sell underperforming assets while maintaining your long-term investment strategy. Always consider your marginal tax rate as part of this decision. Tax loss harvesting at a low marginal tax rate may be relatively ineffective at reducing your lifetime tax liability.
6. Leverage Tax Gain Harvesting
Veterans with lower incomes in 2025 may qualify for the 0% federal long-term capital gains tax bracket. This means you can sell appreciated assets without incurring federal taxes on the gains, providing a valuable opportunity to reset your cost basis and optimize your portfolio.
How Long-Term Capital Gains Work:
- Long-term capital gains apply to investments held for more than one year before being sold.
- For 2025, the 0% tax bracket applies to single filers with taxable income up to $48,350 and married filers with taxable income up to $96,700.
- Gains beyond these thresholds are taxed at 15% or 20%, depending on your income level.
Why It Matters:
- Realizes gains tax-free at the federal level for those in the 0% bracket.
- Resets the cost basis, lowering future tax liabilities.
Special Opportunity for Veterans: This strategy is particularly beneficial for veterans who deploy to a combat zone during the year. Combat zone tax exclusions often lower taxable income significantly, making it easier to qualify for the 0% long-term capital gains bracket.
Action Step: Complete your tax projections before the end of the calendar year to determine if you will fall into the 0% bracket. If you do, sell assets at a gain without crossing into the 15% tax bracket.
Note that this strategy applies to federal taxes and is most beneficial for veterans who have tax residency in a state without income taxes or do not tax any income earned by active duty service members. Most states with income taxes also tax capital gains.
Final Thoughts
For military veterans, proactive tax planning is an essential part of building a secure financial future. Implementing these strategies in 2025 can help reduce your tax burden either in 2025 or over the course of your life.
The critical step in each case is to develop tax projections to facilitate these tax moves. MFAA members are financial planners who works with military and veterans and can help with your tax moves and many other financial planning issues. Click here to get started.