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 theMilitary.com Tax Prep section.]
Remember those simple childhood days when it was a big deal to finally be tall enough to ride on the big rides? Then there was that period where you were tall enough for the big rides, and still not too tall to go on the little rides and fast food restaurant play places. As you continued to grow, somewhere in that 44-56" height range - some of those early childhood rides and play places started to phase out. This is what some deductions and most credits are like, with Adjusted Gross Income (AGI) as discussed in Part 2, acting as that measuring stick placed just outside the ride entrance.
Adjusted Gross Income (AGI) - Below the Line Deductions = Taxable Income
Deductions taken after AGI is determined are typically personal, rather than business, deductions. Every taxpayer is entitled to the greater of the Standard Deduction ($12,600 Married Filing Jointly / $6,300 Single / $9,250 Head of Household) or the sum of itemized personal deductions. Though the deduction taken ultimately doesn’t change AGI when it comes to tax credit amounts that can be taken, it can greatly affect the amount of taxable income exposed to marginal income rates. Below is just a partial list of common deductions that military personnel should examine in their individual filings.
Home Mortgage Interest – This deduction is what makes homeownership both attractive and attainable. It is also the deduction most likely to boost itemized deductions over the IRS standard deduction amounts. In most cases, mortgage interest on a primary residence and second home is fully deductable, subject to a maximum amount ($1,000,000 of mortgage outstanding plus any grandfathered debt). Two important points - 1) Interest from Home Equity Loans and Lines of Credit used to improve the home are tax deductable up to the lesser of a sum total of $100,000 in loans or the difference between the home’s fair market value minus the amount of mortgage principal still outstanding. (1) This can be a factor if equity loans were drawn and the property value of the home subsequently dropped or if another home equity loan is taken. 2) Mortgage and interest payments on a rental property (even if it was a home that was once a primary residence) are business deductions against the Schedule E income, not deductions in this particular category.
Real Estate Tax. The actual amount paid in County and Local Real Estate Taxes as depicted in Box 5 of your 1098 Mortgage Statement is deductable from income so as to prevent double taxation of income. Some states also have personal property tax on items such as automobiles, aircraft and watercraft. Those taxes are deductable.
Medical and Dental Expenses. There is an AGI threshold for deductions in medical / dental expenses incurred for yourself, spouse, and dependents not otherwise covered by health insurance. Costs must exceed 10% AGI. Those over 65 are temporarily exempted from this change and can deduct expenses exceeding 7.5% AGI until January 2017. (2) Post–tax monthly medical and dental insurance premiums paid do not count as expenses for inclusion in this category.
Charitable Donations. In general, charitable contributions to qualified organizations can be deducted up to an amount equating 50% of household AGI, but the type of charity that is the recipient of your donation will affect how much of your specific contribution amount can be used for a deduction. For example, public charities, including church organizations, and private operating funds garner 50%; private foundations and fraternal organization contribution deductions are 30%. Non-cash donations above $250 must have a receipt listing the recipient organization and amount maintained in the taxpayer’s records; non-cash donations over $5,000 must have an appraisal. (3)
Job Related Expenses. To be deductable, a work-related expense must be required by your employer, be a condition of employment, and necessary to perform assigned responsibilities. (4) For military reserve personnel assigned to units greater than 100 miles from your home of record, this is a key deduction opportunity – unreimbursed travel, lodging, and meals costs (subject to the area meal per diem limit) are deductable, and as discussed in Part 2, those deductions lower your AGI.
Finally, there are deductions that are subject to cumulative expenses that exceed 2% of AGI. Tax Preparation costs, investment expenses, unreimbursed job expenses are some examples.
It is prudent to review allowed deductions and compare the calculated itemized deduction to the standard deduction in your specific household filing category. If itemizing leads to a larger overall deduction, then you owe it to yourself to claim the itemized deduction amount. As mentioned in Part 1, proper documentation is important to maintain to support all tax deduction declarations.
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Todd Severance is a 1992 graduate of the U.S. 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 business consultant 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.
1. From IRS.gov
4. Official 2013 H&R Block Tax software information
