Service members and families will find some gems in this year’s tax law changes that could lessen their tax burden or bump up their refund.
Younger service members with or without children might see some extra cash coming to them through changes in qualifications for the Earned Income Tax Credit. And those with children are seeing bigger benefits with two major child tax credits.
But first, the basics. The deadline for filing the 2021 tax returns — or to file an extension — and pay any taxes owed is April 18 for most taxpayers.
There are some long-standing tax filing extensions available for service members: If your duty station is outside the U.S. and Puerto Rico, you are allowed an automatic two-month extension without requesting an extension. If you’re unable to file your taxes by then, you can request an additional extension to Oct. 15 by filing Form 4868. If you are in a combat zone, your deadline for filing and paying taxes is generally extended for the period of your service in the combat zone, plus 180 days after your last day in the combat zone. Your tax preparer can help you file for these extensions, or you can refer to the “Extension of Deadlines” rules in IRS Publication 3, the Armed Forces Tax Guide.
The safest, fastest and most accurate way to file those taxes is electronically, and choose direct deposit if you’re expecting a refund, said Susan Mitchell, executive director of the Armed Forces Tax Council. Sometimes filing electronically with tax software or with a tax professional helps answer a lot of questions and makes sure returns are complete.
There’s tax help for service members and families. Take advantage of free, professional, military-specific tax preparation help that’s offered by the Defense Department and the military services. Although there are fewer tax centers operated by legal assistance offices on bases, you may find this free tax preparation service is available at an installation near you. Check Military OneSource for Voluntary Income Tax Assistance locations.
Tax centers operating on base have IRS-trained volunteers who can help with military-specific tax topics and situations, such as extensions and deadlines while serving in a combat zone, and how new tax laws may affect the military community. The VITA service is open to active-duty members and their families for free, and to retirees when space is available.
The Defense Department also offers free tax preparation and filing software through Military OneSource, available to military members and spouses, and to veterans for up to one year after they retire or separate from the military. Military OneSource also provides tax consultants trained in military tax issues who are available for free, through mid-October.
“Many of the current issues apply to everybody, but the military population is a special population, with unique circumstances and unique situations that make it more important to know about these issues, oftentimes because of their mobility,” said Mitchell, a retired Army attorney.
Before you file this year, make sure you have all the documents you need, starting with the usual W-2 forms for your income and earnings. For service members, these are also available online through myPay.
For various reasons related to the pandemic and multiple tax law changes over the past couple of years, the Internal Revenue Service has a backlog, so they’re starting the year already behind. According to the IRS national taxpayer advocate, as of late December, the IRS had a backlog of 6 million unprocessed original individual returns. If you’re one of those 6 million people, you don’t have to wait for the IRS to process your 2020 return before you file your 2021 return.
The IRS has said that if you file your tax return electronically and choose direct deposit, you should generally see that refund within 21 days.
There are some important changes in tax credits for 2021 that can benefit military personnel and families. It’s also important to know the difference between deductions and credits.
Tax credits can reduce the amount of tax you owe or increase your tax refund, and some credits may give you a refund even if you don’t owe any tax, according to the IRS. Deductions reduce the amount of your taxable income before you calculate what you owe.
For service members, Basic Allowance for Housing and Basic Allowance for Subsistence are among a number of pay and allowances that aren’t included in gross income. Service members’ pay while serving in a designated combat zone isn’t taxable. For the full list of pay and benefits that are excluded from taxable income, visit IRS Publication 3.
Earned Income Tax Credit benefits more troops
Changes in qualifications for the Earned Income Tax Credit, which provides a tax break for low- to moderate-income workers and families, “are a huge benefit to quite a few young service members,” Mitchell said. If you qualify, you may be able to reduce the taxes you owe or get a bigger refund.
For starters, the age ranges for “childless EITC” have been expanded for tax year 2021 only. Previously it was ages 25 to 64. Now, it’s has been lowered to 19 with no upper age limit. For tax year 2021, the maximum EITC for those with no children or other dependents is $1,502, up from $538 in 2020.
There are income limits to qualify for the credit: Singles with no dependents must have an adjusted gross income of no more than $21,430, for example, while married taxpayers filing jointly with no children have an adjusted gross income cap of $27,380.
Adjusted gross income is your total income minus adjustments such as student loan interest, contributions to retirement accounts, or other qualifying circumstances.
The credit increases with the number of children: Married taxpayers filing jointly with three or more qualifying children and making no more than $57,414 could receive up to $6,728.
For 2021, the IRS will allow taxpayers to choose to calculate the EITC using their 2019 earned income as long as it was higher than their 2021 earned income. In some cases, this will give them a bigger credit. Mitchell advised running the numbers using the 2021 earned income as well as the 2019 income, to see which is more beneficial. You can’t use your 2020 income in figuring your EITC for 2021.
You can use your nontaxable combat pay to figure your EITC, but you should run the numbers both ways to see which gives you more cash.
| Children or relatives claimed as dependents | Maximum adjusted gross income (single, head of household, widowed or married filing separately | Maximum adjusted gross income (married, filing jointly) | Maximum amount of credit |
|---|---|---|---|
| 0 | $21,430 | $27,380 | $1,502 |
| 1 | $42,158 | $48,108 | $3,618 |
| 2 | $47,915 | $53,865 | $5,980 |
| 3 or more | $51,464 | $57,414 | $6,728 |
| Source: IRS.gov |
Tax credits for children
Child Tax Credit: The American Rescue Plan extended this credit into 2021, and bumped it up from $2,000 in 2020 to $3,000 per child in 2021. It’s $3,600 for children who were under age 6. The age limit for qualifying children also increased, from 16 to 17.
Half of that credit was paid in monthly payments, from July to December. You’ll need to use the IRS Letter 6419 to reconcile the payments and file for the remaining tax credit for each qualifying child, generally the extra $1,500 or $1,800 per child — i.e., the other half. The letters, which the IRS sent to taxpayers in January, include the total amount of payments issued, the number of qualifying children, and the amount the taxpayer should still expect to receive. That additional money will be received in the form of a child tax credit when the 2021 tax returns are filed. If the IRS didn’t have information about the birth or adoption of a child in 2021, the taxpayer can get the full amount.
This year, that’s also fully refundable, Mitchell notes, meaning that the IRS can issue a refund check if the credit was worth more than the filer’s income tax liability. And it’s available to those who don’t normally have to file a tax return because their income is below the threshold; but you must file a tax return to get the Child Tax Credit.
Child and dependent care tax credit: “This is one I think is very helpful for military families to know about,” Mitchell said. More expenses are available for this work-related credit, such as childcare expenses, and more families with higher incomes will qualify.
The maximum credit in 2021 is 50% of one dependent’s qualifying expenses, up from 35% previously. The maximum amount of qualifying expenses is now $8,000, up from $3,000 in 2020. So those who have the maximum $8,000 in expenses and qualify for the 50% would get a tax credit of $4,000. Those with two or more qualifying dependents and $16,000 in expenses would get a credit of $8,000.
The higher the taxpayer’s income, the lower the percentage of the credit. This year the adjusted gross income cap for the maximum 50% credit was increased from $15,000 to $125,000. Above that level, the credit percentage reduces, and at $438,000 of adjusted gross income, it completely phases out.
If the family has an employer-provided dependent care benefit such as a flexible spending account, that amount must be subtracted from the total eligible expenses.
Adoption Tax Credit: For 2021, credit can be taken on up to $14,440 of qualified expenses, which is an increase over the $14,300 credit in 2020. The full credit of $14,440 can be taken for adoption of special needs children, even if actual adoption expenses are not that high. There are also income limits: the credit phases out completely at a modified adjusted gross income of $256,660 or more.
Educational assistance benefits
For the general population, to include the military, if you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits. Normally, it’s all considered taxable income, but that is suspended in 2021 for the first $5,250. “The military is paying for some of this education,” Mitchell said. That’s another reason you should make sure you get all your documents and check them before you file. You shouldn’t have to take any action, because the $5,250 should be excluded from those benefits that are reported as income.
Economic impact payments, aka stimulus checks
In 2021, the IRS sent out a third round of economic impact payments equal to $1,400 for each member of the family. This year, the IRS has also been sending out letters detailing the amount of those payments made last year. (It’s possible you haven’t received one yet, they are late.) Some people didn’t receive checks, or received less, because the payments were phased out based on the adjusted gross income from the previous year’s tax return.
“Technically, that third stimulus check was an advance payment of the recovery rebate credit, so when you file the 2021 return, you have to reconcile the third stimulus payment that you received,” Mitchell said.
People who are missing a stimulus payment or got less than the full amount should review their information at IRS.gov, to determine whether to claim a recovery rebate credit on their 2021 federal tax return. The IRS provides a secure portal for individuals to find all their federal tax information from previous years.
Those W-2C forms
Chances are, you received a W-2C form (Corrected Wage and Tax Statement) from the Defense Finance and Accounting Service related to Social Security or “OASDI” tax withholdings. Remember that period from September through December 2020 when your paycheck was higher? Those higher paychecks happened because Social Security taxes were temporarily deferred for most service members and civilian employees, due to an executive order from then-President Donald Trump to ease some of the economic pain during the pandemic.
DFAS collected those taxes back in wages from January through December 2021. So a W-2C was sent reflecting the full withholding of the employee’s share of those taxes, collected back from wages paid from January to December 2021.
“For those folks, it doesn’t mean they have to file an amended return. It essentially tells them this amount has been paid,” Mitchell said. According to the IRS, no further steps are required if you had only one employer in 2020, and your Form W-2C only shows a correction to Box 4.
Other reminders:
♦ Unreimbursed moving expenses. Military members can still deduct certain unreimbursed moving expenses related to permanent change of station moves. Don’t deduct any expenses for services that were provided by the government, or expenses that were reimbursed by an allowance you didn’t include in income.
While DoD covers most of the expenses for service members when they move, there may still be some unreimbursed expenses. In 2021, service members faced multiple problems because of shortages of truckers and labor for moving companies. Many chose to move themselves under the Personally Procured Move program. Although service members are reimbursed 100% for eligible expenses in these do-it-yourself moves, some families may have had extra expenses they can claim as deductions. In addition, the problems finding adequate housing at a new duty station also caused some extra expenses.
Use IRS Form 3903 if you want to deduct unreimbursed moving expenses. For more information, see the IRS tax topic Moving Expenses for Members of the Armed Forces, and IRS Publication 3.
♦ Capital gains taxes for military homeowners. Taxpayers can generally avoid paying capital gains taxes on the sale of their home as long as they’ve owned it and used it as their qualifying principal residence for at least two of the five years preceding the sale. The amount of profit that can be excluded from taxes is $250,000 for single taxpayers and $500,000 for married couples filing jointly.
But military members get an extra benefit — extending that qualifying time period by up to 10 years, for a total of 15 years, if they’re assigned to a duty station that’s at least 50 miles away from the house for a period of 90 days or more.
Avoid common mistakes
There are a number of common mistakes to avoid, Mitchell said, such as mistyping a Social Security number, math mistakes, and returns that are sloppy and inaccurate. Many mistakes can be caught by using tax software or a tax professional — don’t forget the free software offered by Military OneSource, and the tax preparation service that may be available on base through your legal assistance office. Generally if you use the software, it will perform some of the more complex calculations.
The names on the returns must be exactly the same as they appear on the Social Security card. If you’re filing a paper return, don’t forget to sign it.
If you’re getting a refund deposited electronically, make sure the bank account numbers are correct.
Make sure you’ve chosen the correct filing status. Generally, your marital status on the last day of the year determines your filing status for the entire year.
Mitchell encourages taxpayers to print out their returns after they’re finished, and review them before submitting them to the IRS to make sure they’re accurate.
IRS.gov is a great help, Mitchell says, with links for resources and services provided, and answers to tax questions. “Publication 3, the Armed Forces Tax Guide, is super helpful,” she said, with tax deadlines and a wealth of other information specific to service members.
And don’t forget Military OneSource’s MilTax services. The online service is free, including the free tax software and the support from tax consultants when you have questions. Call 800-342-9647 to schedule an appointment with a consultant, or go to Military OneSource for information about a live chat. There are also calling options if you are overseas.
Karen has covered military families, quality of life and consumer issues for Military Times for more than 30 years, and is co-author of a chapter on media coverage of military families in the book "A Battle Plan for Supporting Military Families." She previously worked for newspapers in Guam, Norfolk, Jacksonville, Fla., and Athens, Ga.
