Categories
Financial Planning Investing Savings Taxes

Do Military Families Really Need a Financial Planner?

military families financial advisor

Do Military Families Really Need a Financial Planner?

I am frequently asked some form of this question, and my short answer is, “Yes, military families need a financial planner.” You may think I believe military families need a financial planner because I am a financial planner. And while I would never turn away a new prospective client, my reasoning might be even sneakier than you think!

Every military family needs someone to do the things a financial planner does. These include, but aren’t limited to:

  1. Develop specific and measurable financial goals consistent with their values
  2. Develop saving, spending, investing, and tax strategies to efficiently meet those goals.
  3. Develop risk mitigation strategies for the unexpected: 1) Insurance against loss of income;  2) Insurance against catastrophic loss;  3) Contingencies to reach plan goals even if the planner isn’t there to see it
  4. Accountability to execute the steps of the plan
  5. Establish efficient asset transfer when the plan has ended
  6. Periodic review and update the plan as life happens

It is not always necessary to outsource those duties to a professional financial planner. The person performing those tasks can be a family member. There is an endless supply of free information about financial planning on the internet. Much of it is good enough to help individuals do a creditable job managing their family’s financial plan. If you do it yourself, the price is right, there are no issues of trust, and (you don’t need to tell me) financial planning can be fun!

Therefore, my sneaky response that every military family needs a financial planner is just me having a bit of word fun.

You need a financial planner. You just don’t need to hire one if you’re willing to do the work yourself. However, even if you’re willing to be your own financial planner, you might still want to hire one. Here are a few reasons why.

You Prefer to Pay for the Service

I know how to change the oil in my truck. I can change the oil in my truck for less than it costs me to pay someone else to do it. When I was a young sailor, I used to get under my vehicles every 5,000 miles and change the oil and the filter. I’m 55 now, and I’m not crawling under that truck ever again. There are hundreds of things I’d rather do.

Likewise, you can be your own financial planner. You can read and study on personal finances to stay abreast of the trends, opportunities, and ever-changing tax laws. You can burn a Saturday or two each year reviewing your overall financial situation and making some tweaks to your plan to keep it on track. Or, you can hire someone else to do it and go and do hundreds of things you’d rather do.

Professional Financial Advisors have Greater Objectivity about Your Money

There used to be a fellow on public radio named Garrison Keillor. He told humorous stories about his hometown where “all the women are strong, all the men are good looking, and all the children are above average.” The joke is that only the people from that town believe in their superiority – and they believe it because their emotional attachment to their town causes them to lose their objectivity.

The same is true for people and their money. Money evokes strong emotions in people. (Not having money evokes even stronger emotions!) I’ve too often seen successful, well-adjusted people make emotionally-fueled decisions when the markets are gyrating like they were when the pandemic first hit. It can be helpful to have a professional advisor take a more objective view of your finances when the ride gets bumpy.

There’s Something to Be Said for Experience

Have you ever been the licensed passenger with a teen and a new permit? That’s some white-knuckle fun! They kinda know what they are doing, but they don’t know what they don’t know. They haven’t seen things like the car beside them changing lanes without signaling, or an emergency vehicle trying to make a left in front of them, or a gaggle of bicyclists blowing through stop signs. You have seen things like this; hence, the white knuckles!

If you are your own financial planner, then you are a bit like that teenager. You may have studied diligently and learned many things, but you don’t know what you don’t know. You may have studied for many hours, but you’ve only ever seen one financial plan – yours! Professional financial planners have seen hundreds of financial plans. They’ve seen rental homes, student loans, SBP, and tax law changes. They’ve dealt with the things you’re dealing with, and that experience can be useful.

Financial Advisors can Provide Continuity

“Jim” was adept at personal finance. After his military career, he worked in management for a Fortune 500 company. He amassed a portfolio of stock and real estate worth more than $2 million. My very first client was his widow. I was volunteering at a free financial clinic. She was literally the first person I ever tried to advise. She came to the financial clinic because she wanted to learn how to handle money. Jim had always taken care of it when they were married, and she had no clue what to do. When I first met her she was inhabiting only the upstairs of her house because the downstairs zone heater was broken and she didn’t know how to get the money to have it repaired. She was working in the lunchroom of the public school to have money to pay for her daughter’s tuition. She had $2 million, but she was living like a pauper because she was scared to death to access the assets for fear she would screw up something.

I envisioned Jim looking down from Heaven with his face in his palm. There was no way this is what he intended. If they had worked with a financial advisor while Jim was still alive, they could have had a plan to deal with him unexpectedly passing. A plan that kept the heat on and the tuition money flowing without his widow slinging hash in the school lunchroom. A plan that provided simple peace of mind.

Military families do need a financial planner, and the first step in that plan is who will orchestrate it. An individual family member can take on the responsibility of making sure all the required elements of the financial plan are accomplished, but a military family may want to hire a professional financial planner. If they do, we hope they first consider a member of the Military Financial Advisors Association. We believe the education, experience, and fiduciary standards we require of our members are exactly what military families deserve.

Contact one of our advisors to learn more with a free consultation

Browse MFAA profiles

Categories
GI Bill Paying for College

Getting Your Free Application for Student Aid (FAFSA) Squared Away

getting your student financial aid (FAFSA) squared away

Get Your Student Financial Aid Squared Away

What is the Free Application for Federal Student Aid?

The Free Application for Federal Student Aid, or FAFSA, opens on October 1, 2020. Student borrowers use the FAFSA to apply for federal financial aid to help pay for college. When it comes to paying for college, there are three key factors that determine each student’s cost. Out of pocket costs for college are based on:

  • Your family’s unique financial situation,
  • The student’s academic record, and
  • The school’s financial aid policies.

Completing the FAFSA is the first step in accessing financial aid from both the U.S. Department of Education and the school you plan to attend.

Filling out the FAFSA communicates family financial information to the school’s financial aid office. The U.S. Department of Education uses the FAFSA to determine who receives federal financial aid. Federal financial aid includes work-study programs, grants, subsidized loans, and unsubsidized loans. Colleges and Universities use the FAFSA along with the Expected Family Contribution (EFC) to calculate a student’s financial need. Each school has their own unique combination of need-based aid and merit-based aid. Students should contact the school’s financial aid office for more specific information.

In just a few days on October 1, 2020, the FAFSA for the 2021-2022 school year will be available. Students and parents can complete the FAFSA even if they are not sure which college they will attend. Applying for financial aid early gives college students the best chance to receive financial help paying for college. Most colleges will set a priority filing date, which can be as early as 1 December.

Missing the priority filing date could mean missing out on grants and other limited aid. Students can send FAFSA information to colleges and universities throughout the year. The sooner you submit your financial aid package to the school, the better.

For most students, completing the FAFSA takes about 45-55 minutes. Before you sit down to fill out the application, gather your personal and financial information. First, determine whether the student an independent student or a dependent student.

Who is a dependent student?

Before you start filling out the FAFSA, you will need to understand who qualifies as a dependent student. Your status as a dependent or independent student determines whose information is included in the FAFSA. Dependent students receive family support, so parental information is required. Independent students support themselves. Therefore, only the student household information is included. Dependent status is determined by your tax household. To be considered a dependent student you have to meet all of the following requirements:

  • You are under the age of 24.
  • You are not married.
  • You are not active-duty military.
  • You are not a veteran.
  • You are not a grad student.
  • You are not a parent.
  • You are not an emancipated minor.
  • You haven’t been a dependent/ward of the court, been orphaned, or have been in foster care at all since you turned 13.
  • There are special considerations for homeless students or at-risk students as well.

If you do not meet all the above requirements, you are considered an independent student.

Why does it matter if you are a dependent or independent student for financial aid?

This distinction between dependent and independent students matters a lot. For dependent students, any financial aid awards will consider parental income and assets. For independent students, any financial aid awards only consider their income and assets. Dependent students need to coordinate with parents to access their tax return and other financial information to complete the FAFSA.

Active duty service members under the age of 24 are independent students.

Military spouses under the age of 24 are still considered independent students.

For service members and spouses, parental financial information is not needed to complete the FAFSA. All you need is your household financial information. This means that only the student’s financial information is considered when schools calculate the Expected Family Contribution. And while the military refers to spouses as dependents, spouses are not dependent students. Military spouses are independent students, even if they are under age 24. Even if Mom and Dad still pay the cell phone bill.

For military families with teenagers heading off to college, those teenagers will most likely be considered dependent students. Review the list above if you aren’t sure. Parents will need to gather their financial information and tax returns to prepare for filling out the FAFSA.

As a service member or family member using the Post 9-11 GI Bill, will I need to fill out the FAFSA?

Yes!

Check out this great overview of the Post 9-11 GI Bill, written by MFAA member Andrea Clark. Remember the FAFSA is your doorway to state and school-based aid, as well as federal student aid. Many schools offer additional benefits for students using the Post 9-11 GI Bill. These extra benefits are only available once you have completed the FAFSA and shared the Student Aid Report with the school.

Utilizing your Post 9-11 GI Bill benefits does not disqualify you from other federal student aid, such as grants, work-study, subsidized and unsubsidized student aid. Nor does it disqualify you from other state or school-based scholarships and aid.

Take these steps before you start filling out the FAFSA

Take some time to gather your financial records before sitting down to fill out the FAFSA. It is the responsibility of the student to fill out the FAFSA. And while parents may be tempted to handle this task for their student, student involvement is required. Dependent students and parents must each create their own unique FSA IDs and passwords.

Parents cannot create an FSA ID for their child. The FSA ID and password allows you to log in to StudentAid.Gov and complete the FAFSA. It also allows you to sign the FAFSA electronically.

What information do I need complete the FAFSA?

To complete the FAFSA you will need the following information. You will need your parent’s information if you are a dependent student.

  • Name, date of birth, social security number (This includes for parents as well as dependent students.)
  • Tax returns from 2 years prior (The FAFSA considers your tax return from the prior-prior year. That means if you are filing the FAFSA this October 1, 2020, you will need your 2018 Tax Return.)
  • Students and parents will need all their W-2s for the past 2 tax years. The FAFSA form contains a tool to link your application directly to the IRS. This is your best option. If you cannot link your accounts, you can enter the information using the data from your tax return.
  • Financial account information: checking, savings, retirement accounts, 529 plans, investment accounts.
  • Information about your real estate assets: mortgage information, tax assessed value (not Zillow)

Filing the FAFSA gets complicated for blended households. For more information, check out the U.S. Department of Education’s Parent’s Guide to Completing the FAFSA Form. They even have a handy graphic. Be sure you read the questions on dependency carefully. Keep in mind, dependent status is defined according to the IRS rules.

Tips for filling out the FAFSA

  • When you fill out the FAFSA, ‘you’ and ‘your’ mean the student. If the FAFSA requires parent’s information, it will be specifically stated. Read carefully and pay close attention to whose information is needed.
  • Be prepared to list each school’s Federal School Code when you complete the FAFSA. If you are considering more than 10 schools, list the first 10. Log out. Log back into your application and select ‘Make FAFSA Corrections’. Update your school list with the remaining schools. You can also call the Federal Student Aid information line to add schools to your list. Finally, you can add schools to your paper Student Aid Report and mail it back to Federal Student Aid.
  • In order to receive student aid, you will need to file the FAFSA for each year you are in college.
  • Keep student FSA IDs and parent FSA IDs separate. Don’t log in at the same time and only log in under your own FSA ID.

Choosing your college, paying for school, and understanding your financial aid award gets more complicated each year. Rely on trusted resources. For more information visit Studentaid.gov, the U.S. Department of Education’s blog, or contact one of the MFAA advisors as we would love to be able to help!

The Bottom Line

Paying for college is typically the second-largest purchase most of us will make in our lifetimes. Sometimes, we will even do it twice, paying for our own education as well as our children’s education. It is so important that you maximize your purchasing power and financial strategy.

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to playing for college. We would love to be of help and have a free consultation.

Find an advisor here!

Categories
Taxes

Military Payroll Tax Deferral

military payroll tax deferral

Military Payroll Tax Deferral Explained

On August 8, 2020, President Donald Trump issued a memorandum allowing the military payroll tax deferral for any employee earning less than $4000 every two weeks. The $4000 limit refers to gross, or pre-tax earnings. It is important to notice the memorandum defers the taxes, it does not eliminate, revoke, or waive these taxes.  In essence, the government could collect any non-paid taxes at a future date.  Right now, the repayment date is scheduled for early 2021.  But before we tackle that issue, let’s cover some of the important information surrounding payroll taxes.

Understand Your Military Payroll Taxes

Payroll taxes, also referred to as FICA (Federal Insurance Contributions Act) pay for Social Security and Medicare. These taxes are listed as FICA Social security and FICA Medicare on military Leave and Earnings Statements (LES) and are also often abbreviated on employee paystubs. FICA taxes are split between the employer and the employee. These taxes are levied at 15.3% of earnings up to $137,700. Read more about the Social Security wage base here. There is no wage base for Medicare taxes. In fact, if you are a high-income household, there is an Additional Medicare Tax rate of .90% to wages, salaries, and tips.  Employees pay 6.2% for Social Security and 1.45% for Medicare, with matching amounts paid by employers. For military service members, Social Security and Medicare taxes are paid on all entitlements earned.

Employers are already eligible to defer payroll taxes under the CARES Act.

The Presidential memorandum defers payroll taxes (just the Social Security portion of 6.2%) from September 1, 2020 through December 31, 2020 for all federal employees. Under the CARES Act employers are already eligible to defer payroll taxes through December 31, 2020. Some self-employed individuals are also eligible to defer their SECA (Self-Employed Contributions Act) taxes. For now, the memorandum does not address employee options for participation if the employer does not choose to participate. There may be further clarifications to come. You can read more about IRS guidance on payroll tax deferral here.

Per the official memorandum, there will be no penalties or interest charges to deferred taxes. The Secretary of the Treasury has been directed to explore options for forgiving the deferred taxes. This means there is a potential that the deferred amounts will not have to be repaid. At this time there is no guarantee that forgiveness of deferred amounts will happen. Deferred taxes owed may have to be repaid in 2021. Currently, deferred taxes must be repaid in full between January 1, 2021 and April 30, 2021. Essentially, your payroll tax deductions would double for the first 4 months of 2021.

Military members have no choice

For civilian employers the program is voluntary. For federal employees, including the military, information published by DFAS indicated that deferral of employee taxes (6.2% of earnings) will not be optional. Currently, there is no way to opt-out of the deferral and no indication that an opt-out option is being considered. For now, federal employees and military service members will see more money in their mid-month pay.  But they may be forced to pay back the increase over the first four months of 2021.

If you are a civilian employee, check with your employer to see if they are participating in the payroll tax deferral. Many are not.  Many employers are concerned about the ramifications of payroll tax deferral.

If you are a military service member or federal employee, there is an easy way to calculate the increase in pay due to the payroll tax deferral. Let’s work through a quick example for a hypothetical September paycheck. The calculation would look like this:

Military Payroll Tax Half-Month Example

Earnings from 9/1-9/15: $4000.00
Monthly payroll tax 6.2%: X .062
Taxes deferred: $248

 

Military Payroll Tax Full Month Example

Earnings from 9/1-9/30: $8000.00
Monthly payroll tax 6.2%: X .062
Taxes deferred: $496

What do you do if you see your calculated increase in pay in your next paycheck? Set the money aside and don’t spend it!
Right now, there is no guarantee of any legislation to forgive the deferred taxes. Repeat for each paycheck through the end of 2021 or until there is more clarification on this issue.

For employees, whether you are civilian, federal, or military, save the payroll taxes for now. If you are military, you have likely experienced being over-paid only to have DFAS reach back months (or years) later with large extra deductions from your paycheck. Consider the payroll deferral like another DFAS error. Save the overpayment. You know they will come for it eventually.

The Bottom Line

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to your taxes. We would love to be of help and have a free consultation.

Find an advisor here!

Categories
GI Bill

Maximize Your Post-9/11 GI Bill Benefits

Maximize your 9-11 GI Bill Benefits

Maximize Your Post-9/11 GI Bill Benefits

The Post-9/11 GI Bill offers potentially the most valuable and flexible VA educational benefits to date. Eligibility extends across all service statuses – Active Duty, Guard, and Reserve.  Servicemembers who have already earned a college degree as part of their military service still qualify for use of the Post-9/11 benefits.  Even better, this educational opportunity can be transferred to the servicemember’s dependents, rewarding the sacrifices made by military families in supporting the mission.

The Post-9/11 Veterans Educational Assistance Act of 2008 created one of the biggest sweeping changing to military education benefits with the Post-9/11 GI Bill since the original GI Bill was created by President Franklin D. Roosevelt in 1944. The Post-9/11 GI Bill provides up to 100% of education, housing, and fees for college education over 36 months (academic months) and can also be used for certain licensing and certification tests as well.

Veterans who have served at least 90 days of active duty service after September 10, 2001 and received an honorable discharge will qualify for the Post-9/11 GI Bill. To qualify for the full benefit, a veteran must have served at least 3 years of active duty after September 10, 2001. Those who qualify for the Active Duty GI Bill or the Reserve GI Bill will have the option to choose which benefit best suits their need.

Also note that the Harry W. Colmery Veterans Educational Assistance Act of 2017, “Forever GI Bill,” changed many aspects of the Post-9/11 GI Bill, some of which went into effect immediately and others on a rolling basis.

We at MFAA want you to know and understand some of the important planning considerations surrounding the use of this military benefit.  Here are the major details of the benefit, followed by our Top 10 planning considerations when using the Post-9/11 GI Bill benefits.

Eligibility:

  • Active duty members: served at least 90 days after September 10, 2001.
  • Guard and Reserve members: served 90 days after September 10, 2001 on Title 10 orders (federal service).
  • Spouse and children: servicemember can elect to transfer credit to a spouse after six years for immediate use and to children after six years of service for use after serving another 4 years (use begins at 10 years of service).
  • Addition to Montgomery GI Bill (MGIB): Service members who have previously used 100% of entitlement under the MGIB can qualify for 12 months of Post-9/11 Benefits. If you have not exhausted your MGIB entitlement, you can switch from the MGIB benefits.

What is covered (if you are at least a half-time student):

  • Tuition and fees: up to 100% for in-state, public institution. Private and foreign school reimbursement is capped at $25,162.14 per year. Exceptions apply at Yellow Ribbon schools.  [see below]
  • Qualifying programs: 2- and 4-year colleges and universities, apprenticeships, on-the-job training programs, vocational flight training, correspondence schools, national testing programs, and licensing and certification testing. You can use this VA Institution Search Tool to verify the educational institution’s eligibility.
  • Monthly BAH: rate based on E-5 with dependents for zip code of location of institution.  This is paid directly to the beneficiary, not the educational institution.  If the program is all online If the benefits are used by the service member or the spouse while still on active duty, no BAH is paid.  In other words, no double dipping on BAH.
  • Book stipend: $1000 per academic year for 4 years, paid to the beneficiary on a quarterly basis.
  • Yellow Ribbon Programs: If the service member has 100% eligibility for the Post-9/11 benefit, a YRP school offers extended benefits.  The tuition and fees exceeding the normal maximum payment is split between the school and the VA.  Active duty servicemembers and spouses are not eligible for this program. Due to specific agreements that the VA has with each school that participates in the Yellow Ribbon Program, check with the VA for the most current criteria. You can learn more about this important boost to the Post-9/11 benefit HERE.

Example:  your child attends an out-of-state pubic institution whose tuition and fees are $8,000 per year more than your state’s public institution.  If the out-of-state school participates in the YRP, the institution will cover $4,000 of the excess tuition and the VA will cover the remaining $4,000.

  • Relocation Allowance: For servicemembers in rural areas, there is also a $500 one-time benefit if they must relocate or travel by air to the nearest school.

Determining full-time or half-time student status

Undergraduate classes training time is determined this way. If 12 credits are considered full-time, a course load of 6 credits yields a training time of 50% (6 ÷ 12 = .50), whereas a course load of 7 credits yields a training time of 58% (7 ÷ 12 = .58). In this scenario, a student would need to enroll for at least 7 credits (such as two 3-credit classes and a 1-credit lab) in order to receive the housing allowance benefits.

For graduate training, the VA will pay benefits based on what the school reports full training time to be. So, if a student is taking 3 graduate hours and the school tells the VA that is considered a full-time student, the VA will pay at the full-time rate.

Once the training time is determined, the monthly housing allowance is paid at the nearest 10% level. For instance, if a student’s training time is determined to be 58% as calculated above, that student will be paid 60% of the applicable housing allowance. If student training time is calculated to be 84%, the VA will pay 80% of the applicable housing allowance.

Earning the Full 9/11 GI Bill Eligibility

The payment rate depends on how much active duty time the servicemember has. Purple Heart recipients, regardless of length of service, are qualified for Post-9/11 benefits at the 100% level. The vast majority of servicemembers must have completed 36 months of active duty service to qualify for 100% of Post-9/11 GI Bill benefits, but there is a sliding scale shown in the chart below.

 Member ServesPercentage of Maximum Benefit Payable
At least 36 months

100%

At least 30 continuous days on active duty and must be discharged due to service-connected disability

100%

At least 30 months, but less than 36 months

90%

At least 24 months, but less than 30 months

80%

At least 18 months, but less than 24 months

70%

At least 12 months, but less than 18 months

60%

At least 06 months, but less than 12 months

50%

At least 90 days, but less than 6 months

40%

Note that time served towards earning Post-9/11 GI Bill benefits is AFTER completing military service as payback for other military education benefits like student loan repayment, ROTC scholarships, and Service Academy commitments.

To utilize the Post-9/11 GI Bill benefits for college, servicemembers must pursue an education at an accredited institution that grants college degree. It can be used for all post-graduate degrees: from an associates degree and a bachelors degree to a masters degree and doctorate degree.

Post-9/11 GI Bill Approved Training and Assistance

Servicemembers released from active duty before January 1, 2013 have a 15-year time limitation for use of benefits.  For individuals whose last discharge date is on or after January 1, 2013, the time limitation has been removed.

There are other changes associated with the Forever GI Bill that are being phased in over time so students should review updates from the VA.

GI Bill Comparison Tool

The VA offers a helpful GI Bill Comparison Tool to help show which education program and school are best based on different criteria.

 Applying for the Post-9/11 GI Bill?

Servicemembers can submit an application through the Veterans ON-line Application (VONAPP) Website. Or, call 888-GI-BILL-1 and ask to have the form (VA Form 22-1990) mailed.

Top 10 Planning Considerations:

  1. Transfer at least one credit as soon as eligible. You MUST transfer credits while on active duty before reaching 16 years of service and have 4 years of retainability.  You can always add or subtract entitlement after you get out. But, if you don’t transfer at least one month of benefit entitlement to your dependent, you are out of luck.  You won’t be able to add them later.
  2. Online-only study may be common this academic year. In this case, the BAH rate is a flat $916.50 per month regardless of location.
  3. The GI Bill is not just for the standard 4-year college degree. Many other programs are covered.  Be sure to use the institutional search tool.
  4. You may feel like you are losing part of the benefit by not receiving BAH if you are still on active duty. However, that may be the best time to use the benefit to increase earning potential for when you retire or separate from the military.
  5. If you have more than one dependent who may use the benefit, consider reimbursement rates in different states and at different institutions. One dependent may attend the less expensive local community college program vs another at the private university in high BAH zip code.  The overall value to the family may be dramatically different.
  6. BAH is paid directly to the family and can be saved and invested for the benefit of another dependent. Low interest federal loans will still be available for room and board expenses to the dependent currently using the VA benefit.  This strategy could still be an equitable distribution among siblings while requiring some “skin in the game”.
  7. Contact the financial aid office at the institution as early as possible. Very often there is a dedicated military benefits coordinator; ask when you call.  Some Yellow Ribbon schools only provide the extra benefit to a set number of students on a first-come, first-served basis.
  8. Always fill out the FASFA and other required institutional financial aid forms, even if you think you will use the VA benefits. When more than one family member is attending college at the same time, your overall family financial need will be greater and you may receive general financial aid.  It may pay to “turn off” the VA benefits during that time. Example:  Oldest child uses two years of VA benefit.  Younger sibling starts college and for two years they both qualify for greater institutional aid because the family demonstrates more “need”; benefits are turned “off”.  Oldest graduates while younger sibling finishes last two years using VA benefits.
  9. Benefit usage is counted by the day, not by the month. Breaks between terms are not counted.  If you attend a school on a trimester or quarter schedule (more term breaks), this may lead to using less of the benefit compared to traditional semesters.  In some case, the 36 months of benefits could stretch out closer to five “traditional” years of college.  The beneficiary currently using the benefit will receive the accounting statements for what is used and what remains.
  10. Use of Post-9/11 GI Bill benefits does limit the tax credits you can claim for post-secondary education. Be sure to talk with your tax professional about balancing these two tax planning scenarios.

Contact any MFAA planner to talk about how this benefit can be used to your family’s greatest advantage.

You earned it!

Categories
Disability Pay Reserve Component Taxes

What is Concurrent Retirement and Disability Pay?

Concurrent Retirement and Disability Pay

Understanding Concurrent Retirement and Disability Pay

If you are currently serving in the military and receiving disability pay, you are probably familiar with the fact that you cannot receive your disability payment for time you are being paid for military service.  What you may not know, is that this regulation is also applied when you receive your military pension, as the law states that you cannot receive military retired pay and VA compensation at the same time.
There is an exception to this, as in 2004, the Concurrent Retirement and Disability Program (CRDP) was put into place.  In this article we will talk about what CRDP is, who qualifies, and go through some examples to help explain the program.  We will also discuss Combat Related Special Compensation; what it is, how it relates to CRDP, and how to choose when you qualify for both.

Who Qualifies for CRDP?

You are eligible for CRDP if:

  • You are a regular retiree, with a VA Disability rating of 50% or higher, or
  • You are a Reserve retiree with 20 or more qualifying years of service, have a VA Disability rating of 50% or higher, and have reached retirement age, or
  • You retired under the Temporary Early Retirement Act (TERA) with a VA Disability rating of 50% or higher, or
  • You are a disability retiree who earned entitlement to retired pay under any provision of the law other than solely by disability and you have a VA Disability rating of 50% or higher.

Do I Need To Apply For CRDP?

No, no application is necessary, if you fall into one of the categories we discussed above, you will automatically be enrolled.

How Does CRDP Work?

CRDP is a restoration of your retired pay that was not paid to you because you received Disability Pay.  Let’s look at an example.
SFC Smith is a retiree that receives $2,000 per month in retired pay and $142 per month in disability pay.  She has a 10% disability rating from the VA.  SFC Smith’s monthly payments will look like this:

  • Disability pay $142 (non-taxable)
  • Retirement Pay – $1,858 (taxable, her $2,000 retirement pay is reduced by the amount of her disability payment)
  • Total Monthly Payment – $2,000

That is how it worked prior to CRDP, and how it still works for anyone receiving disability pay with a rating less than 50%.
Now, let’s make SFC Smith’s disability rating 60%, with a monthly disability payment of $1,131.  Since SFC Smith is a regular retiree and has a disability rating greater than 50%, she will receive CRDP.   SFC Smith’s payments will look like this:

  • Disability pay $1,131 (non-taxable)
  • Retirement Pay – $869 (taxable, her $2,000 retirement pay is reduced by the amount of her disability payment)
  • CRDP – $1,131 (taxable, restores her retirement pay withheld)
  • Total Monthly Payment – $3,131

As you can see, a pretty nice benefit, that can really add up over years of payments for those that qualify.  For CRDP recipients, they will receive two payments per month; their retirement pay which will include the CRDP amount and the disability payment.

Is CRDP the Same Thing as Combat Related Special Compensation?

No, Combat Related Special Compensation (CRSC) is a separate program from CRDP.  While CRDP is a restoration of retirement pay withheld, CRSC is an entitlement that you are paid, thus reimbursing you for all or a part of the retired pay withheld.  Since it is not considered retirement pay, CRSC is non-taxable.

CRSC Eligibility

To be eligible for CRSC you must:

  • Be entitled to and or receiving military retired pay
  • Be rated at least 10% by the VA
  • Waive your VA pay from your retired pay
  • File a CRSC application with your branch of service

Some pretty big differences here between CRDP and CRSC.  First, the disability rating is lowered from 50% to 10%, however, the disability must be related to combat service.  Secondly, while CRDP will be automatically paid if you are eligible, you must apply for CRSC.  You apply for CRSC on DD Form 2860, which is sent to the specific branch of service that you were in.  Documents you will need to complete the 2860 include your DD-214, VA Determination Letter, Medical Records, and Orders.

How Does CRSC Work?

SFC Smith is a military retiree who receives $2,000/month in retired pay.  As a 20% rated disability recipient, SFC Smith also receives $281 in monthly disability payments.  SFC Smith applied for and receives CRSC and 100% of her disability rating is directly related to combat.  Here is a breakdown of the payments SFC Smith will receive:

  • Retirement Pay – $1,719 (taxable, her $2,000 retirement pay less her $281 disability pay)
  • Disability Payment – $281 (non-taxable)
  • CRSC Payment – $281 (non-taxable)
  • Total Monthly Payment – $2,281 ($1,719 taxable and $562 non-taxable)

In this example, 100% of SFC Smith’s disability was determined to be combat-related.  Let’s also look at an example where that isn’t the case.
SFC Smith is a military retiree who receives $2,000/month in retired pay.  As a 20% rated disability recipient, SFC Smith also receives $281 in monthly disability payments.  SFC Smith applied for and receives CRSC and 50% of her disability rating was determined to be directly related to combat.  Here is a breakdown of the payments SFC Smith will receive:

  • Retirement Pay – $1,719 (taxable, her $2,000 retirement pay less her $281 disability pay)
  • Disability Payment – $281 (non-taxable)
  • CRSC Payment – $140.50 (non-taxable)
  • Total Monthly Payment – $2,140.50 ($1,719 taxable and $421.50 non-taxable)

As the example shows, CRSC will only compensate you for the portion of the retirement pay you waived in order to receive disability payments that were determined to be combat-related.

If You Qualify For Both, Which Should You Choose?

If you qualify for both CRSC and CRDP, DFAS will pay you the amount that will result in a higher monthly payment in the initial year you qualify, which will remain the case until the first CRDP/CRSC Open Season.  During the Open Season, DFAS will mail you an election form where you can choose to receive either CRDP or CRSC.  During subsequent years, you will not receive an election form.  You can still change your choice during the Open Season, but you will need to request the change yourself.
There are two big factors you should consider when choosing whether to receive CRDP or CRSC.

What Percentage of Your Disability is Combat Related?

CRDP will pay 100% of your retirement pay withheld, while CRSC will only pay the percentage related to combat disabilities.  Where this factor really comes into play is if your disability rating changes over time.  For example, let’s say you are rated 50% by the VA and 100% of that rating is combat-related, CRSC will pay 100%, so you elect CRSC.  Five years go by and you file a new claim with the VA for a non-combat rated disability and get assessed as 70%.  Now, you may be receiving only 71% of your withheld retirement pay through CRSC, where CRDP would pay 100%.  It may be more beneficial for you to elect the change.

Taxes, Taxes, Taxes

As with most financial decisions, we have to factor in the effect of taxes.  CRDP is taxable, while CRSC is non-taxable.  This could lead to scenarios where electing CRDP may give you a higher monthly payment, but because it adds to your taxable income, you may be better off electing to receive the non-taxable amount provided by CRSC.
Now that you have a better understanding of CRDP and CRSC, there are multiple variables at play.  As you can see, the decision may not always be black and white.  Working with a member of the Military Financial Advisors Association, who understands the VA and military financial system can help to walk you through your options and recommend the one best suited for you.

Do you have questions or wonder whether CRDP or CRSC is the better option for your situation? Contact one of our advisors to get your free consultation!

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Investing TSP

TSP Lifecycle Fund Changes

TSP Life Cycle Funds

What’s the Deal with TSP L Funds and their new updates?

Unicycles, bicycles, lifecycles – The Thrift Savings Plan (TSP) Lifecycle (L) Funds are evolving again. Beginning on July 1, 2020 the L Funds are going through some changes. Here’s the lowdown on what the L Funds are, how they are changing, and a bonus benefit you might not have considered.

TSP has core funds and lifecycle funds you can invest in. The five core funds are:

  1. Government Securities Investment (G) Fund – invests in short-term U.S. Treasury bonds.
  2. Fixed Income Index Investment (F) Fund invests in government, corporate, and mortgage-backed U.S. bonds.
  3. Common Stock Index (C) Fund – invests in large companies that trade on U.S. Stock Exchanges.
  4. The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund.
  5. International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries.

Each of the TSP L Funds, sometimes called target date funds, are designed to meet your needs based on when you plan to tap your TSP retirement savings. If you plan to start spending your TSP savings starting in 2030, the L 2030 Fund is designed for you. You can choose whichever L Fund that matches your situation. New servicemembers in the Blended Retirement System that do not make a choice will automatically be put in an L Fund based on their age.

When choosing an L Fund year, pick a fund target date that matches the year you plan to start spending your TSP savings. This will most likely NOT be the year you could retire from the military. In most cases, if you draw from TSP before age 59 ½ you will pay a 10% penalty. Very few servicemembers will be allowed to serve long enough to retire after that age. Your fund target date maybe the year you plan to finish second career or when you become eligible for Social Security in your mid-sixties.

Each L Fund is made up of the five core TSP Funds—G, F, C, S, and I—in different proportions. The L Funds are target date funds, meaning the proportions of the core funds in each L Fund automatically adjust (also called a “glidepath”) as you get closer to the year you plan to retire (your target date). The L Funds are set up based on the idea that when your retirement is far in the future, you can take more risk (market ups and downs), while seeking greater reward (higher growth in value). You have time to recover from any market downturns before you’ll need your money. When your target date is close, you may want to be more conservative (lower risk, lower rewards) with your investments.

To make the gradual adjustment from riskier to more conservative investments on your own, you can regularly shift some of the money in your TSP account from the more aggressive C, S, and I Funds to the more conservative G and F Funds as you approach retirement. The beauty of the L Funds is that TSP does all that work for you, it’s “fire and forget”.

What is changing?

More choices! TSP is introducing six new L Funds to the lineup.

Right now there are four L Funds in ten-year increments – L 2020, L 2030, L 2040, L 2050 and the L Income Fund. When a target year arrives, it is rolled into the L Income Fund, the most conservative L Fund designed for your retirement years. So, July 1, 2020, the L 2020 is being retired. On that date TSP is also adding five new funds: L 2025, L 2035, L 2045, L 2055, L 2060, and L 2065. The five-year intervals give you more options to more closely match your investment time line. Also, the new L 2055, L 2060, and L 2065 are designed for our youngest servicemembers with long saving horizons.

TSP Life Cycle Funds

As you can see in this chart, L 2065, L 2060, L 2055 will be invested 99% in higher risk/higher reward stocks (C,S,I Funds) and just 1% in less risky/lower reward bonds (G and F Funds). L Funds with sooner target dates have less risk. The L 2025 Fund will be invested in 50% stocks (C,S,I Funds) and 50% bonds (G and F Funds). Each month, TSP adjusts the proportions of each L Fund to gradually become less risky as the target date approaches. For example, the investment proportions of the L 2050 Fund will gradually change over time so that in 20 years it will look like the L 2030 Fund in the chart above.

More aggressive. In the past, the TSP L Funds were sometime criticized for being too conservative compared with outside target date funds and didn’t consider service members may also get a pension. In response, beginning July 1, 2020 all the TSP L Funds proportions will gradually change to invest a bit more in stocks (C, S, I Funds) and a bit less in bonds (G and F Funds). The percentage of stocks in the L Income Fund will gradually rise from 20% to 30% over a 10-year period. For the funds in between L 2055 and L Income, the stock allocations will not increase on July 1, 2020, but they will be frozen until they eventually come in line with the glide path planned for the newest L Funds.

More international. Starting April of this year, all the L Funds now have a slightly higher allocation of international stocks (I Fund) than they used to. One planned change to include stocks from less developed (emerging market) countries in the TSP I Fund had been put on hold. Watch for more news on that later this year.

Bonus L Fund Benefits

Hands-off rebalancing. Another great feature of the L Funds is that by design they are constantly taking advantage of changes in the market to buy low and sell high. As we’ve already seen, each L Fund has a certain target proportion of the five core TSP Funds. As markets go up and down, the value of each core fund changes. For example, this year when markets initially reacted to the Coronavirus, the C, S, I Funds’ values dropped significantly, while the G and F Funds held pretty steady. In order for the L Funds to maintain their target proportions, the L Funds had to sell some G and F Fund bonds to buy the now lower priced C, S, I Fund stocks.

A few months later, when the markets went back up, they sold back some of the C, S, I Fund stocks at a profit and put that money back into G and F Fund bonds. This is known as “rebalancing”. The TSP L Funds make these buy and sell adjustments every day. Over time this maintains the funds target riskiness (proportions of the core funds), while earning a higher return than if they had just bought once and held those investments. If you own just the core TSP Funds, you can log into TSP and do your own rebalancing. But you can only rebalance among all the funds two times a month. The L Funds do this for you every day, hands off.

Overall, TSP L Funds are a great choice for anyone who just wants to choose a plan once and let the TSP experts do all the work. Decide what year you think you will begin spending your retirement savings and choose an L Fund closest to that year. If your plans change or you decide you want to be more hand-on, you can log on and make changes to your TSP anytime.

Do you have questions or wonder how best to optimize your TSP? Contact one of our advisors to maximize your retirement savings!

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Categories
Investing TSP

Military Thrift Savings Plan Essentials

thrift savings plan essentials

Understanding the military thrift savings plan essentials

The Thrift Savings Plan (TSP) is the government long-term retirement savings and investment plan, similar to a civilian 401(k). Together TSP, Social Security, and military pension make up the three pillars of the military retirement system. Service members can make voluntary contributions to TSP through automatic payroll deductions. If you are in the Blended Retirement System (BRS), you will receive contributions paid by the military into your TSP account as well. These contributions are invested for you and are intended (but not guaranteed) to grow over time and provide you with income in retirement.

Contribute

Service Contributions – BRS members (only) receive an automatic contribution by the military to their TSP account every month equal to 1% of your basic pay, regardless of whether you make any contributions yourself or not. This money becomes yours (vested) after two years in the service.

Payroll deduction – BRS members who began or rejoined service on January 1, 2018 or later are automatically enrolled in TSP. 3% of your basic pay is automatically deducted from your paycheck every month and deposited in your TSP account. You can change your contribution if you want. Everyone else must proactively elect their own TSP contributions. For 2020 you can contribute up to $19,500 to your TSP. Service members age 50 or older can make an additional $6,500 Catch Up contribution each year.

Service Matches – BRS members (only) also receive matching contributions (additions to your TSP account) on the first 5% of the pay you contribute each month.

TSP Essentials Tip – Steady Wins the Prize. Matching contributions for BSR members are made month-to-month. If you elect to make large payroll contributions int the beginning of the year and hit the annual limit early, you could lose out on matching contributions later in the year. Consider spreading your payroll contributions out evenly to the end of the year to get all your due.

TSP Essentials Tip – Don’t Leave Money on the Table. BRS members should consider increasing your contributions to at least 5% so you get the full-service match.

Pay Taxes – Or Not

There are two kinds of TSP accounts, Traditional and ROTH. Services will make the automatic and matching contributions for BSR members to their Traditional TSP account. You can choose to make your contributions to a Traditional or ROTH TSP account. The main difference between the two is how they are taxed.

Traditional TSP -Traditional TSP contributions that you make reduce your taxable income, so the amount of taxes that come out of your paycheck now are less. When you withdraw money from TSP, usually in retirement, the entire amount (contributions and investment earnings) is taxable as regular income. For many people their tax rate in retirement will be less than when they’re working and they would pay less taxes overall with a Traditional TSP.

ROTH TSP – With ROTH TSP you pay taxes now on your contributions just like regular income. But when you withdraw money from your ROTH TSP it is completely tax-free (including earnings) as long as it’s withdrawn at least five years after your initial Roth contribution and you are at least 59 1/2 years old, permanently disabled, or deceased.

Tax-exempt contributions – Contributions you make to Traditional TSP while earning tax-exempt pay in a combat zone are not taxed when you make the contribution or when you withdraw it. However, the earnings that grow in your Traditional TSP will be taxed as normal income when you withdraw it. For contributions you may make to a ROTH TSP with tax-exempt pay, the contributions AND the earnings are completely tax-free as long as you meet the withdrawal requirements in the ROTH TSP paragraph. Servicemembers 50 and older can make catch-up contributions with tax-exempt pay only to a ROTH TSP. Catch-up contributions to a Traditional TSP cannot be made with tax-exempt pay.

TSP Essentials Tip – Pay Now, Pay Less. Service members with lower income, such as early in your career, should consider making ROTH TSP contributions. If your tax bracket is lower now than when you retire, you will pay less tax in total with the ROTH.

TSP Essentials Tip – Pay No Tax. You should consider making your TSP contributions to ROTH TSP while you’re deployed to a combat zone. As long as you meet the ROTH withdrawal requirements (59 ½ and 5 years), both the contributions you make to ROTH TSP with tax-exempt pay and the earnings that grow over the years are not taxed. Ever.

Invest Two Ways

TSP offers you two ways to invest your money. The first way is with “Lifecycle” L Funds. These funds are a professionally designed mix of stocks, bonds, and government securities. You select your L Fund based on your “target date,” the year in the future that you plan to start withdrawing your money. Depending upon your plans, this may be as soon as you leave the service or further in the future. The second way is to invest in individual TSP funds. This way you make your own decisions about your investment mix by choosing from any or all of the individual TSP investment funds (G, F, C, S, and I Funds).

When you start TSP contributions, you designate which TSP Funds you want your contribution to go to. If you are a BRS member and do not make a selection, all contributions TSP receives for you will go into an L Fund appropriate for your age.

L Funds – Your target year is when you will expect to start withdrawing money from TSP. For example, the TSP Fund L 2040 has a target year of 2040 and is designed for those who will begin withdrawals in years 2035 through 2044. L Funds assume that if you who won’t need your money for quite a long time, you are able to tolerate more risk (ups and downs) while seeking an overall higher return (increase in value).

The L Funds invest in mix of individual TSP investment Funds (G, F, C, S, and I Funds) and automatically adjust the mix to reduce risk (and returns) as you get closer to your target year. If the target year is a long time from now, that L Fund will be more exposed to risky assets, such as stocks in the C, S, and I Funds. The L Income Fund is designed for those who are already withdrawing from TSP and offers lower risk and lower growth. As the value of stocks and bonds go up and down, each of the L Funds is automatically rebalanced to restore its intended investment mix. In practice this rebalancing forces the L Funds to “buy low and sell high” for you each business day, boosting your return and while maintaining the same level of risk.

TSP Essentials Tip – Rebalance. For those of you in L Funds your set, TSP rebalances for you. If you choose to invest in the individual TSP Funds, you can rebalance among any of the TSP funds yourself up to 2 times a month. Determine what target percentage of each fund you want to maintain, then periodically log into TSP and do an inter-fund transfer by typing in your target percentages.

Individual Funds – TSP has five individual funds you can invest your TSP dollars in. The Government Securities Investment (G) Fund is invested in short-term U.S. Treasury securities. This is the only fund that guarantees you will not lose money. Your contributions (principal) and interest are guaranteed by the U.S. Government. The trade-off is the growth in value will be quite low and might not keep up with inflation.

Each of the other four individual funds (F, C, S, and I Funds) are invested to track separate market indexes. For example, the Common Stock Index (C) Fund seeks to invest in the same stocks as the Standard & Poors (S&P 500) Stock Index. This index includes 500 large companies that trade on U.S. Stock Exchanges. One dollar you invest in the C Fund buys you a tiny portion of each of those large companies. This helps reduce (but not eliminate) your overall risk by diversification, that is “putting your eggs” in many, many baskets.

The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund, and tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index. The International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries and tracks the MSCI EAFE (Europe, Australasia, Far East) Index. The Fixed Income Index Investment (F) Fund invests in a government, corporate, and mortgage-backed bonds U.S. Bonds and tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

TSP Essentials Tip – All L Fund or None. The L Funds are already made up of the five individual TSP funds (G, F, C, S, and I Funds), so you will duplicate your investments if you invest in an L Fund and the individual TSP funds at the same time. Consider choosing only an L Fund for simplicity and hands-off investing, or build and mange your own custom portfolio from among the other G, F, C, S, and I Funds.

TSP Essentials Tip – Early Bird Gets the Worm. Making and maintaining investment choices can seem intimidating. Don’t let that keep you from getting started. You can start now with an L Fund, let the pros work it for you, and start watching your nest egg grow. As your knowledge and confidence grows, you can always make changes and take more control if you want to.

Withdrawals

Retirement – TSP is a qualified retirement plan designed for long-term saving for retirement. You will be able to make retirement withdrawals from TSP once you reach age 59 ½. Generally, if you withdraw money before that time, you will be hit with a 10% penalty, in addition to any taxes due. When you are eligible, you will be offered a choice of regular “installment” payments from your balance, a single lump-sum payment, or purchasing an annuity that guarantees a set monthly benefit for life to you (or your survivor).

In-service – There are two types of withdrawals you can make while you are still in the service, financial hardship and age based “59 ½”. You can make a financial hardship withdrawal if you
can certify you have a financial hardship as a result of a recurring negative cashflow, legal expenses for separation or divorce, medical expenses, or a personal casualty loss. You can only withdraw contributions you made and earnings on those contributions. You can request $1,000 or more; but, the amount cannot exceed the actual amount of your certified financial hardship.
You can make age-based in-service withdrawals any time after you reach age 59½. You can withdraw it all, or part of your account balance up to four times per calendar year.

TSP Essentials Tip – Don’t Eat Your Seed Corn. Early TSP withdrawals can have steep penalties and taxes due. Even penalty-free withdrawals permanently deplete your retirement savings and any future earnings those saving would have made. Consider building an emergency fund and separate accounts for short-term savings that you can tap when you need it. Then your retirement savings will still be there when you need it.

Loans – You can borrow up to $50,000 of your contributions from your TSP account while you are still in the service. There is a $50 processing fee and most loans must be paid back with interest within 5 years. You can get up to 15 years to pay back a loan for a primary residence. If you don’t pay your TSP loan back on time, there will be a 10% withdrawal penalty and the IRS will charge you income tax.

End Note

It’s never too early to start saving for retirement. The key to growing a mighty oak from a seed? Time. Even small amounts put away now will have a major impact on your financial future. Start by tracking your income and expenses, making a spending/saving plan (budget), and then carving out some TSP contributions to seed your future.

One “Final” TSP Essentials Tip – Name a Beneficiary. A beneficiary is the person (or people) that will receive your TSP funds when you die. If you have not designated someone as your beneficiary for your TSP, government law determines who gets it. You can designate the beneficiary you want with TSP, just be sure to update it with life changes like a marriage or divorce.

For more information on TSP, go to www.tsp.gov

Do you have questions or wonder how best to optimize your TSP? Contact one of our advisors to maximize your retirement savings!

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Categories
Reserve Component Taxes

Deducting Reserve Expenses

Understanding when you can deduct Reserve expenses

While for many of our National Guard and Reserve servicemembers, traveling to monthly Battle Assemblies right now is not an option, we do hope that in the near future we will be back to meeting together, in-person, as a unit. When the stop order movement is lifted, it is important that all servicemembers are aware of the tax rules around being able to deduct your out of pocket expenses for travelling to drill.

What is the Regulation?

The Tax Cuts and Jobs Act, which passed in 2017, suspended the ability of taxpayers to claim miscellaneous itemized deductions that exceed 2% of their Adjusted Gross Income, which included work expenses. However, the law still allows those tax-payers that fall into four categories to continue to deduct their expenses; Armed Forces reservists, qualified performing artists, fee-basis state and local government employees, and employees with impairment-related work expenses. In this article, we will focus on the Armed Forces Reservists; who qualifies, what expenses they can claim, and how to claim them on your tax return. We will also give some tips on how to best track your expenses throughout the year to make it easier on you come tax time.

What Service Members Can Claim the Expense Deduction?

Not all service members can claim the expense deduction, to qualify the Soldier must meet a couple tests; all of these questions must be a “yes” in order for you to claim your expenses.
  • Test 1: Were you employed as an Armed Forces Reservist who traveled more than 100 miles from your tax home to complete Reserve related duty? (For IRS purposes, a Reservist is a member of the Military Reserves, National Guard, or Public Health Service)
  • Test 2: Did you have job-related business expenses?
  • Test 3: Are your deductible expenses more than the total of your reimbursements for those expenses?
  • If you can answer yes to all three of these questions, then you are eligible to claim your expenses on your tax return.

What Expenses Can You Claim?

Vehicle Expenses
  • If you regularly drive over 100 miles to your Battle Assembly, you can claim vehicle expenses
  • The rate you can claim (For 2019) is 58 cents per mile driven
  • For example, if your Reserve Center is 100 miles away from your tax home, each month that you drive to your duty would create a deductible expense of $116
    • 100 miles times .58 = $58
    • $58 X 2 (round trip) = $116
  • Alternatively, instead of claiming the miles, you do have the option to claim actual expenses
  • Under actual expenses, you will keep detailed track of your auto related expenses such as gas, oil, repairs, insurance and then multiply this total amount by the percentage of miles driven for reserve duty versus non-reserved duty throughout the year
    • For example, if you spent a total of $5,000 on vehicle expenses and the percentage of overall miles driven for reserve duty versus all miles driven is 1%, you could claim $50 as vehicle expenses for the year
    • $5,000 times 1% = $50
  • It is important to note that if you are using the standard mileage rate, you must do so in the first year you use the vehicle for reserve travel, you can always switch to the actual expense method in later years
Parking Fees, Tolls, and Transportation that didn’t Involve Overnight Travel
  • If you drove to and from military duty on the same day without staying overnight, you can deduct parking fees, tolls, and transportation costs, to include train, bus, etc.
Travel Expenses for Overnight Stays
  • These expenses include lodging, airfare, car rental, etc.
  • Do not include meals in this category
  • You can include incidental expenses, which covers items such as fees and tips; instead of tracking actual incidental expenses, you can use the alternate method of $5/day, but you can only use this alternate method if you are claiming no meal expenses for the same day
Meals
  • You can deduct meal expenses for travel that keeps you away from your tax home overnight
  • You can use actual expenses or claim the standard meal allowance, which for most locations is $51/day, but may change based on the specific location of duty
  • Even if you are using the standard allowance, you still must keep records showing the time, place, and purpose of your travel
  • For deduction purposes, you will be able to claim 50% of expenses related to qualified meals

How Do You Claim the Deduction?

  • To claim the expenses on your tax return, you will need to file IRS Form 2106 with your return
  • You will use Form 2106 to report your expenses, reimbursements, and to calculate the total amount you can deduct
  • Once you or your tax preparer have completed Form 2106, it will give you a value that you can ultimately transfer to your 1040, reducing your tax liability for the year
Best Practices
  • Trying to figure out your expenses for the previous year when you do your taxes will be a time consuming and frustrating experience
  • To make this easy, you must build a process for tracking these expenses as you incur them, to help with this, I’ve shared a tracker that you can easily update and adapt to fit your specific needs here
  • Document, document, document…keep your receipts, they are your way of proving to the IRS that you incurred them and that you are accurately reflecting them on your return
  • Don’t confuse the tax deduction with your Inactive Duty Training (IDT) Travel reimbursement, they are two separate things, with two separate rules and regulations
    • For example, the mileage rate you can claim and be reimbursed for on your IDT local voucher is 17 cents per mile, in contrast with the 58 cents per mile you can claim on Form 2106
  • You can’t “double-dip!” If the military reimburses you for those expenses, keep track of that as well as you will need to report the reimbursements on Form 2106

Deducting Reserve Expenses Example

CPT Smith is a US Army Reservist, who lives in Boston, MA but is assigned to a unit that is based in Fort Dix, NJ.  He passes all three tests, allowing him to be able to deduct his reserve travel related expenses; his specific expenses are below for 2019.
Expense Category Raw Numbers Total Expense Reimbursed Amount Unreimbursed Expense
Vehicle 5000 miles drive $2,900 (.58/mile) $2,900 $0
Transportation (non-overnight) N/A $0 $0 $0
Overnight Travel Costs $1,400 $1,400 $800 $600
Meals $750 $750 $300 $225 (1/2($750-300)
Total $4,675 $4,000 $825
As you can see from this example Form 2106, CPT Smith would be able to claim a $825 deduction on his 2019 return based on his reserve related travel expenses. Being a citizen Soldier isn’t easy and you have to make many sacrifices to continue serving, so at the same time you owe it to yourself to use the tax code to help ease some of the financial burden you incur in your service.  While this may seem daunting to track and calculate all of this, in the end it can pay off, but don’t feel you have to do it alone.  We make it our mission here to understand those tax issues that specifically affect members of our military so that we can best serve you.  If you have questions about reserve related travel expenses or any other military finance related issue, do not hesitate to contact me or any of the financial advisors that belong to the Military Financial Advisors Association.

Do you have questions about your reserve pay expense deductibility? Contact one of our advisors for a free consultation!

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Categories
Savings

Do Military Members Need an Emergency Fund?

Do Military Members Need an Emergency Fund?

The short answer is yes! Yes, you need an emergency fund.

You might think that having a military pension or being an active duty service member is enough of a security blanket but that’s simply not true. Emergencies come in many flavors and they tend to always happen at the most inconvenient times. Getting ready to deploy? Well, your car is about to break down on I-95. You have a brand new baby at home? Get ready for your garbage disposal to make it rain and destroy your kitchen. Or just your friendly neighborhood hurricane running you out of town.

Ok, I’ve convinced you to start an emergency fund, hooray!

Where do you start?

  1. Set a goal. Do a budget and to see what your monthly expenses look like. Normally I recommend 3 to 6 months of living expenses in an emergency fund.
  2. Open a high yield savings account. Look for an FDIC insured bank (online banks offer great rates) that doesn’t have minimum balance requirements. It usually takes 3 days to transfer money out of a high yield savings account but you’ll be earning more than in a traditional savings account. Ally Bank, American Express, Capital One 360, Barclays and HSBC are all good options.
  3. Start a small recurring deposit. You only have $10 extra a paycheck? Start with that and increase it as you’re able to.

I have 3 months of savings, now what? First off, high five! How do you know if it’s enough? I’m going to give you the classic financial planner answer: it depends. Ask yourself:

  • Does your family depend on you solely for income? If the answer is yes, then your emergency fund should be closer to 6 months of living expenses.
  • Are you getting ready to transition out of the military? A larger emergency fund will give the flexibility to take a job because you want to take it, not because you have to.
  • Does anyone in your household have a seasonal job or is self-employed? I recommend a larger buffer, especially if you depend on this income to pay your normal bills.
  • Will you be heading back to school? Is your work contract ending soon? Do you have a baby on the way? These are all good situations where having a larger emergency fund will also provide additional flexibility and peace of mind.

When to Use an Emergency Fund

Now, you’ve built up your emergency fund and you’re happy with the amount you have in your savings account. You did it! You might be wondering, when should I use these savings? Should I ever use them? As military families, we deal with a number of stressful situations so it can be difficult to determine what is a true emergency. Below is a list of examples where using your emergency fund would be using it for its intended purpose:

  • Car repair
  • Death in the family
  • Unexpected medical expenses
  • Job loss or furlough
  • Pay issue (these never happen in the military, am I right?)

History has shown us that even those of us with stable government or military jobs are subject to uncertainty, job layoffs and furloughs. Having an emergency fund will allow you to handle these emergencies without delaying the progress you’ve made on your other financial goals.

Do you have questions or wonder how you can start an emergency fund? Contact one of our advisors to get a free second opinion on your finances!

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