Story updated 12 January 2022
The old saying goes, “The only thing certain is death and taxes.” We all have to pay taxes. Taxes provide funds for the government to pay for benefits, entitlements, defense, and government services. Tax regulations are complicated, and there are many taxing authorities that a military family may have to pay to, depending on where they are stationed, such as city, county, state and Federal taxes. There are different types of taxes, such as sales tax, property tax, usage taxes, and income taxes.
Military compensation has unique features that distinguish it from typical civilian pay. Most military allowances are exempt from income taxation, such as the Basic Allowance for Housing (BAH) and subsistence (BAS). In some circumstances, combat duty pay and bonuses may also be exempt from income tax. Some states exempt military pay from income taxes, which provides a tax advantage to military service members.
What is Federal income tax withholding?
A portion your paycheck is set aside and sent to the U. S. Treasury as your income tax withholding. This is an automatic way to periodically pay a part of the income taxes you have due each year. The IRS Form W-4 is used by an employee to notify his employer on how much Federal (and state) income tax to withhold during each pay period. The amount withheld depends on the tax payer’s marital status, number of dependents, and other adjustments, such as taking into account other sources of household income and itemized deductions.
Federal income tax is a progressive system, with several marginal tax brackets. Taxpayers who earn less income are taxed at a smaller percentage than those who earn more each year. The amount you are taxed depends on your total adjusted gross income as well as your deductions and credits.
What other taxes come out of my paycheck?
In addition to automatic withholding of your income taxes, during each pay period funds are automatically withheld for two other Federal programs: Social Security and Medicare. Social Security, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) program is taxed at 6.2% (3.1% paid by the employee and 3.1% paid by the employer) of taxable earnings up to an annual fixed amount. Medicare’s Hospital Insurance (HI) program is taxed at 1.45% of taxable income.
For example, if during one pay period, a single sailor earns $2,000 in taxable income and is in the 25% Federal marginal tax bracket, standard deductions, and no adjustments to income, and is a resident of Florida, then the following taxes would be withheld (approximation):
- Federal income: $600
- OASI: $124
- Medicare: $29
State income taxes may also be automatically withheld depending on which state the servicemember is stationed in and/or the state of his home of record. Each state’s tax laws are uniquely different.
How do I file a Federal tax return?
Each year prior to April 15th, those people who have earned income (such as military personnel) must file a Federal income tax return. There are three basic forms used for this: IRS Form 1040, 1040A (the “short” form), and 1040EZ (the “easy” form). For tax payers with more complicated returns and sources of income, there are eleven attachments, called schedules, which make specific calculations for categories such as itemized deductions, investment income, or self-employment business income and expenses. The purpose of the annual tax return is to reconcile an individual’s or family’s actual income and deductions to calculate a total tax for the previous year. Then, if that number is more than the cumulative taxes withheld over the previous year, then the tax filer will have to write an additional check to the IRS for the difference. If the amount withheld over the previous year is more than the calculated total tax, then the IRS will issue a tax refund to the taxpayer.
There are a variety of commercial tax software programs available for a service member to calculate and file their own return, or a tax professional can be hired for a fee to prepare the annual income tax return. There are several service organizations that will assist military families with filing their income tax returns for free or at a nominal cost.
Original story by John Sledgianowski, AAFMAA Benefits Advisor.
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