Other articles in this series:
Tax Tips for Troops and Families: Overview
Determining Adjusted Gross Income
Tax Deductions
Taxable Income and Credits
[For tax preparation options and discounts for military families and veterans, see the Military.com Tax Prep section.]
Season endings are always a good time to reflect on what has been accomplished and what to improve upon in the next go around. No doubt 31 of 32 NFL teams are doing that right now by looking at what they could have done better this season. Military units do the same type of reflection post deployment and companies do the same after each fiscal year. Tax season has some similarities, though the goal is not necessarily to gain a larger refund the following year. Unless major life events occur such as purchasing a new house, moving at personal expense, a marked change in household income, or changes in the tax code itself, most taxpayers are likely to face similar income, deductions, and credits in a subsequent tax year. For these taxpayers, the goal is to further reduce their tax burden where possible or to at least match up actual taxes paid throughout the year to the actual tax owed.
W-4. Examine your W-4 on file with your company or PSD or update the number of claimed deductions. This is the form that payroll uses to determine the amount of tax withholdings in each pay period. Updated claimed deductions make pay period tax withholdings more accurate.
Thrift Savings Plan (TSP) / 401k / 403b / 457b Savings. This is an area where a household not only can greatly affect their Adjusted Gross Income and their tax liability, but can also make strides in retirement savings. An individual taxpayer can contribute up to $17,500 from their annual salary pre-tax to place in their tax deferred retirement account. Moreover, because of marginal tax rates, the reduced amount of take home pay is less than annual income minus the amount contributed to your retirement account.
Table 1: Net Annual Pay with / without TSP / 401k Contributions Example (MFJ) using standard deduction.
| Household Income: Married Filing Jointly | Without TSP / 401k | With TSP / 401k |
| Total Household Salary | $100,000.00 | $100,000.00 |
| TSP/401k Contributions | $0.00 | $17,500.00 |
| Standard Deductions | $12,200.00 | $12,200.00 |
| Taxable Income | $87,800.00 | $70,300.00 |
| 10% Bracket ($0-$17,850) | $1,785.00 | $1,785.00 |
| 15% Bracket ($17,851-$72,500) | $8,197.50 | $7,867.50 |
| 25% Bracket ($72,500-$146.400) | $3,825.00 | $0.00 |
|
Total Tax Liability |
$13,807.50 | $9,652.50 |
| Net Annual Pay After Taxes | $73,992.50 | $60,647.50 |
Net Annual Reduction in Take Home Pay Maximizing TSP / 401k contribution at $17,500.00: $13,345.00
Examine your individual financial situation to determine an appropriate amount of money to set aside in a TSP / 401k because there are restrictions and penalties for withdrawing money before turning 59 ½ , but any amount set aside helps reduce tax liability and builds on retirement savings.
Long Term vice Short Term Capital Gains Taxes: The difference between selling an investment held for less than a year versus waiting until it has been held longer than a year is paying 28% in Capital Gains versus paying just 15%. There are added considerations when purchasing mutual fund shares over time (typically selling shares is on a First-In-First-Out approach where it is assumed sold shares are the longest held) and also your overall taxable income bracket (0% and 10% bracket households will pay $0 in Capital Gains). However, consider the amount sold and the reason for selling before accepting a 28% tax rate.
Track Capital Loss Carryover. If your tax return contained greater than $3,000 in Capital Losses, ensure the remainder is carried over to subsequent tax year(s) to be netted with future Capital Gains until that Capital Loss Carryover is complete.
529 Contributions. State Dependent, some 529 Contributions (College Education Savings Accounts) are tax deductable in State Tax Filings to a specific amount. Check individual State 529 Programs to see what the contribution limits are, but there is opportunity to contribute up to the $14,000 annual gift tax exclusion per beneficiary with ability to contribute five years worth up front ($70,000) when starting a 529.
Traditional IRA Contributions. Review Block 13 of your household W-2s. The full deduction is allowed in all cases if you and your spouse are not covered by a retirement plan. Otherwise, the full deduction is limited to annual incomes below $59,000 (Single) and $95,000 (Married Filing Jointly) with deduction phase out between $59,000-$69,000 (Single) and $95,000-$115,000 (Married filing jointly). You can contribute up to a cumulative maximum of $5,500 (Single); $11,000 (MFJ) with $1,000 catch up contributions after age 50 to an IRA account. Roth IRA contributions are not tax deductable (because Roth distributions are tax free).
Todd Severance is a Registered Investment Advisor and 1992 graduate of the US Naval Academy with an MBA from the University of Arizona. He is a Naval Officer (Selected Reserve) with nearly 15 years active duty experience. Todd is pursuing his Certified Financial Planner and is a financial advisor with Echelon Group in Boise, Idaho.
Echelon Group provides Employee Benefits, Retirement Plans, Investment Management; Financial Planning and additional services to companies, its employees, and individuals.
