By Amanda Mitchell, AFC® Candidate
The CARES act and Consolidated Appropriations Act (CAA) included several important changes to taxation that you should know about. These changes are intended to help you recover from potential financial disruptions that were a result of the pandemic so, take advantage if you can. While military service members’ pay was uninterrupted through the pandemic, many working spouses were not as fortunate. Many were pared down to a single income unexpectedly and had to dip into emergency funds. Which is fine, that is what it is there for. However, knowing which credits apply to you is even more important this year because it can help you bump up your tax savings and allow you to replenish your emergency fund and focus on your financial goals of 2021. Here’s what you should know:
Lifetime Learning Credit:
The Lifetime Learning Credit (LLC) helps to pay for undergrad, graduate, and professional degree courses. Unlike the American Opportunity Tax Credit, there is no limit on the number of years you can claim it.
- Now has more favorable income phase-out rules
- You can claim it whether you itemize or not
- It is worth up to $2000 per return.
- It is non-refundable, meaning it will only reduce the taxes that you owe down to $0, you will not receive the difference if your tax bill is less than the credit.
Learn more HERE.
Increased deduction for medical expenses:
The CAA permanently decreases the limitation for deductions for medical expenses to 7.5% of adjusted gross income (AGI). Meaning you can deduct medical expenses that exceed 7.5% of your AGI, previously the limit 10%.
Child Tax Credit and Earned Income Credit:
You can use your earned income from 2019 if it was greater than 2020 to calculate the CTS & EIC amounts. Learn more HERE.
Charitable deductions are available even if you do not itemize:
The CAA extended provisions of the CARES act to include a federal income tax write-off for up to $300 for individuals and $600 for married filing jointly. Learn more HERE.
Retirement Account Withdrawal Penalties
The 10% penalty for early withdrawal from retirement savings was suspended for COVID-related withdrawals. However, there are some caveats to this and you should be very careful to follow the provisions exactly to avoid any issues. You can read more about it HERE.
Deferred Social Security Taxes
Most military service members automatically had social security taxes deferred from mid-September through the end of the year. The recovery of these taxes will be automatically taken from your wages from January to December of 2021. This will not affect 2020 tax filing. Find out more about repayment HERE.
In the end, knowing your way around your taxes is a great way to plan for long-run financial success. If you have specific questions about your current tax situation as a service member you have many resources available to you. Military OneSource provides access to certified tax professionals and MilTax software to complete taxes on your own. If you have a more complicated tax situation, such as rental homes or a home business, it would be beneficial to discuss your situation with a professional before you tackle it alone. If you seek a basic understanding of tax concepts, financial counseling is available to you through your installation’s Family/Community Readiness office.