Financial Frontlines®

I recently returned from a couple of trips to bases where I conduct presentations on current legislative initiatives for military benefits. These events were Retiree Appreciation Days hosted by the bases so the crowds are virtually all retirees. At each event, a few people approached me afterwards to request that MOAA reduce the pressure to fight for military benefits. My third year into conducting presentations for MOAA and this was a first.

Their point was that the country is under economic strain. We (the military community) should do our part to help the recovery efforts by standing pat on our benefits and sacrifice to help the country. After all, we have enough benefits. I listened and thanked them for their participation and feedback.

While I didn’t share my thoughts with them at that moment, if I had, here are some thoughts.

• The top priority of our nation is to provide for the security and safety of us citizens and our way of life. Without security and safety, nothing…else…exists. As a part of that mission, it is in the nation’s interest to care for the small percent of citizens who step up to the plate to ensure the security and safety by potentially making the supreme sacrifice or diminishing their future due to disability. We serve today for our country’s tomorrow. I think we are doing our part by ensuring an economic recovery is even possible and that is worth stimulus.
• The government is spending at record levels; someone is going to get the money. What group or project is more deserving? Again, nothing else exists without security. Do people think that if military benefits stay put or decrease that spending will be reduced? It wouldn’t. The money they would take from the military would go to someone else so what would be accomplished? How many of the pet projects being funded would you rather see cut/reduced before we talk about cutting our security? Besides according to some on the Hill, any/all spending is stimulus, so providing appropriations to military benefits is beneficial stimulus. Given that philosophy, we are doing our part to help the economic condition by fighting for military member benefits.
• We will be making our financial sacrifices when the bill comes due for all the record questionable spending. Someone is going to pay. Considering 18% of tax revenues come from people making between $50-100k, 20% from the $100-200k bunch and 53% from the $200+ crowd, the source of the money is clear. Median income in the nation is $50k. You’re in the top 30% of income sources if your household makes $80k a year; top 20% if you are $100k or above. You think only the top-top households (2% make $250k+; 3.6% make $200k+) are going to pay the trillions of dollars of debt on the horizon?
• Last but far from least, it’s about the enlisted troops and their families. Leaders should stand up for them and we officers more than understand why. Man! I had some great teams and I bet you did to. My success came only because of their efforts.

I respect every one’s opinion, but on this issue, I respectfully disagree. What are your thoughts?

As my colleague Shane notes below, DFAS is required to use the adjusted withholding tables on military retired pay.  For additional guidance on your options, please listen to the audio below.
 
Before you begin, it is helpful to have your 2008 Retiree Account Statement in front of you…

Hopefully this helps provide you with some options as to the effect this change will – or won’t – have on your 2009 taxes.

The question: How do I know my current amount of withholding so I can use it to base my changes to offset the withholding tax reduction?

If you are new to this issue, the Stimulus program will reduce the amount tax deducted from your retired pay to put more money in your pocket each month.  However, your retired pay is not eligible for the tax reduction.  Because of other tax code issues, pay agents (DFAS, etc) are required to implement the tax tables with the tax reduction on retired pay even though the tax reductions don’t apply to retired pay.  See the other posts below by scrolling down for more details. The bottom line is too little tax may come out of your retired pay during the year which may cause you to have a tax bill at the end of the year when filing 2009 taxes.

Here are two retiree pay stub examples: Retiree Pay Stubs

Where the example is circled at #1 is the amount of tax withholding you have deducted from your check on a monthly basis. (The decrease in monthly withholding in the USCG example is not the result of the Stimulus program but this is what the Stimulus decrease will look like). If you file as married-joint, you can expect an $89 per month decrease in that monthly amount–approximately. That is figured based on the $800 reduction for the year divided by the 9 months in 2009 that the program is implemented. Per DFAS, the reduction is implemented in April which is reflected in your 1 May stub. We expect the other pay agents to follow suit. If you file single, use $400 for the year.

You may want to wait until you receive a pay stub with the tax reduction change noted. Notice the difference, before and after, and you have the exact amount of change.

Now you can submit a new W4 form to your pay agent telling them to increase your withholding by the specific amount of the monthly reduction/difference. Or for DFAS folks, go to the MyPay site and make the change on-line; much easier.

Also noted on the examples at #2 is your current withholding status; married-joint, single rate, etc. If you have your withholding designated this way, your withholding is determined by the tax tables that are being changed so expect a change. If you don’t use the tax tables because you ordered a specific dollar amount withheld for taxes, you shouldn’t see a change in your withholding.

Pay agents numbers: DFAS, (800)321-1080; USCG/NOAA, (800)772-8724; PHS, (800)638-8744.

We contacted DFAS for the latest status. The DFAS web page is confusing and we brought that to their attention.

Military retiree checks are not eligible for the tax withholding reduction program. However, you will see the tax reduction in your retiree check because DFAS has no choice but to apply the reduction to retiree checks. It’s an IRS tax code thing not DFAS policy/procedure/system issue. To offset the withholding tax reduction, DFAS recommends you increase your tax withholding by either mailing in a new IRS W4 form or increasing your withholding using the MyPay web based system. Or do nothing and be prepared to possibly owe a bit more in taxes when filing your 2009 taxes.

The tax withholding reduction will be reflected in the 1 May retiree account statements. The 1 May statement is for April retired pay. So from Apr to Dec there will be up to $800 less withholding tax taken from your retired pay–about $89 per month if you file jointly ($800/9 months). The reduction is up to $400 for single filers. If you pay less than $800 a year in taxes (jointly) from withholding, you will have less than the maximum $800 reduction.

If you have a fixed amount withheld from your retired pay, you should not see a change since your withholding is not determined by the IRS withholding tables. If your withholding is determined by the tax tables (married filing jointly, single rate, etc.), you will see the reduction in withholding.

Eligibility for this reduction in the tax withholding program applies only to people who earn a paycheck. If you earn a paycheck and you receive a retiree check, you will see this reduction in your tax withholding in both your employee paycheck and your retiree check but you are only allowed one reduction–the payroll check.

Be sure to check out the previous posts on the tax stimulus programs below. See the posts on 30 and 16 March by scrolling down.

Have you got a child in college? Well, this may be good news for you. The old Hope Scholarship tax credit is now known as the American Opportunity Tax Credit and there’s more than a name change going on here.

The improved tax credit now applies to four years of post-secondary education instead of just two. You can apply the credit towards “qualifying expenses” which includes tuition, fees, and required course materials. The new credit is for expenses incurred in 2009 and 2010. If you have expenses in 2008 for the 2009 spring semester, sorry but you can’t use the credit.

The amount of the credit is 100% of the first $2000 and 25% of the next $2000 for a total possible credit of $2500. The credit is phased out depending on your income but the income limits have been increased. For single filers the modified adjusted gross income limit is between $80-90k. For joint filers, $160-180k. Married filing separately do not qualify for the credit.

Want to know more? Check out this IRS site: http://www.irs.gov/newsroom/article/0,,id=205674,00.html