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Why Service Members Need to Pay Extra Attention to Federal Withholding

April 15, 2015
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By Harry Krampf

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The Americans who serve in our country’s armed forces tend to enter the military as young, single people with no dependents. That often changes, and their finances get more complicated.

With promotions come pay raises as well as additional, nontaxable allowances. Previously single service members may find themselves supporting a young family on a single income, encountering new challenges in budgeting to pay for living expenses and avoid carrying credit card balances. At the same time, they may be getting increasingly larger tax refunds as a result of filing a joint tax return and claiming larger deductions, as well as child, earned income, education, savers and other tax credits.

That’s why it’s especially important for service members to closely monitor their tax withholding and adjust it as needed.

The Defense Finance and Accounting Service, the military’s payroll agency, provides service members direct access to their payroll information, so you can make address changes and adjust your federal and state withholding and Thrift Savings Plan contributions. For federal tax withholding, you can determine how much to withhold from your compensation, taking into account up to 10 allowances, change your filing status, request additional withholdings and more. There is even a link on the MyPay site to the Internal Revenue Service’s calculator to help determine your proper tax withholding for the year.

The withholding calculator can tell you the proper withholding, but it also requires you to enter a lot of information about your current family situation, income and so on. The tax code does change year to year, but if your family and economic circumstances have not changed significantly, a simpler way to determine your required withholding is to look at the previous year’s tax return to see what was withheld compared with how much you actually needed to have withheld — in other words, how much of your federal withholding was returned to you as a refund, or how much your withholding fell short.

Service members should look at the year-to-date withholding on their Leave and Earnings Statement to see what has been withheld so far this year and then look at what is being taken out of this month’s pay. Make a projection through the end of this year to determine how much of that withholding is unnecessary to fulfill your federal tax obligation, and adjust your allowances accordingly. MyPay makes it easy for service members to change allowances at any time, and their withholding will change the following month.

There can be penalties and interest associated with having too little withheld, and, of course, no one wants to owe taxes when it comes time to file. Still, for service members who been having too much taken out of their pay for taxes, this is one way to instantly provide additional disposable income for their family, and it is easy to do. Uncle Sam does not pay interest on your overpaid taxes, and if you somehow don’t claim a refund within three years’ time, you can say so long to it.

(This information is not intended or written to be used as tax advice, and should not be relied on for the purpose of (1) avoiding tax-related penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or tax-related matters addressed herein, for IRS audit, tax dispute or other purposes.)