Filing taxes in the military isn’t much different than filing as a civilian. Although they may receive different tax breaks, army and other military personnel do pay taxes, including federal, Social Security, and Medicare taxes. Some states don’t require military members to pay state taxes on basic pay, and a few others don’t tax income unless the soldier is currently stationed in the state.
In many cases, military families receive tax breaks that result in a nice income tax refund. If Uncle Sam sends you a sizable refund this year, don’t fritter it all away. Invest your refund dollars wisely for a more prosperous future.
Read more tips for military families, and don’t forget to check out our store.
Adjust Your Withholding
It’s fun to get a large check once a year, but it may not be the best financial choice. If the government takes out more than you’re required to pay from your paycheck, you’re basically giving the government an interest-free loan. Keep that money for yourself throughout the year to invest in your kids’ college savings or keep for unexpected expenses.
Talk to a tax accountant or use the IRS’s withholding calculator to determine an appropriate amount of Federal income tax withholding.
Pay Off Debt
Priority one when receiving extra cash is to pay down high-interest debt, especially credit cards and payday loans. “Payday loans can be a particular problem because they set up shop just outside military bases,” says John Cooney, owner of Green and Gold Financial Planning in Middleborough, Massachusetts. “Getting out from under any debt should be the service member’s top goal.”
Start or Build an Emergency Fund
How much do you have in savings? With interest rates rising, it’s a good time to start or build an emergency fund. “It is very easy for a service member to open up an online savings account and get 1.3 to 1.5 percent interest,” says Cooney. “An emergency fund should have at least three to six months’ worth of expenses in it so that service members can avoid having to use credit cards or take out high-interest loans to cover expenses.”
Increase Your TSP Contribution
The Thrift Savings Plan (TSP) is a defined contribution plan for United States civil service employees, retirees, and uniformed services members. In other words, it’s the military’s 401(K).
Terry Smith, a former military member and accountant based in San Diego, California, suggests increasing TSP contributions by one or two percent, or about $100 per month. Use the refund to supplement your monthly take-home pay, which will decrease as your TSP contribution goes up.
Open a Roth IRA
To maximize your nest egg, invest your refund in a tax-advantaged retirement account. Smith advises investing in a Roth IRA. Although you pay taxes on the contribution, distributions are tax-free. “Any time you can build non-taxable future income, it’s a good thing,” he says.
Spend on Movable Things
You’re entitled to spend a portion of your refund on simple luxuries, such as an iPad for your son or a fancy dinner out. Remember, however, what you can and can’t take with you if you have to move.
Military families relocate 10 times more often than civilians — every two to three years on average. “Ensure items you purchase are either highly liquid or able to be moved with you,” says Rob Coons, co-founder and CEO of ScoutMilitary.com, a military discount app. “That new deck is less valuable if you get moved to another state.”
Save for Furniture Expenses
Military members and families have mastered the art of moving to new cities. If your relocation plans include furniture rental to make life simple, set aside a portion of your refund for your next move. You’ll thank yourself a year from now when your first six months of furniture rental are covered.
If you’re single and have your eye on a piece of furniture to buy, remember you may have to store it if you’re deployed. Consider purchasing a high-quality, used furniture set or consider renting furniture, a convenient way to temporarily furnish your home with stylish living, dining, and bedroom furniture without having to worry about storage when deployment hits. CORT Furniture Rental delivers, installs and picks up your furniture whenever you’re done using it.
Choose a military package that suits your needs, add a few extras, and checkout online. CORT delivers and sets up every piece of furniture, down to the last fluffed pillow. You can set lease terms from as short as a few months to a year or more. When it’s time to move, schedule a pickup, and you’re done.
Ready to invest some of your tax refund on quality furniture? Visit CORT today.
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