Military Officer - February 2006 - (Page 61) Military Retired Pay Exemptions Some states try to entice retirees by offering a tax break on military retired pay. The following states exempt military retired pay from state income taxes: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky *, Louisiana, Massachusetts, Michigan, Mississippi*, Missouri*, Nevada, New Hampshire, New Jersey, New York, North Carolina*, Oregon*, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin, and Wyoming. Such exemptions can be worth an extra 3 percent to 8 percent in take-home pay. For military retirees who also are receiving a Social Security annuity, many states also make these payments fully or partially exempt from state taxes. Disability Pay and Concurrent Receipt Recent MOAA-led legislative victories have authorized additional disability pay for combat-related injuries and partial restoration of military retired pay offset by VA disability awards. Unfortunately, there is some confusion between the two. Combat-related special compensation (CRSC) is additional disability pay for qualified retirees with a 10 percent or greater VA rating because of combat or combat training. A servicemember must apply for CRSC. Once the award has been approved, it can be up to the current VA maximum disability payment for a 100 percent disabled veteran. CRSC is exempt from taxation at the federal (and often state) level. Concurrent receipt and disability pay (CRDP) is automatic restoration * These states have conditional exemptions. Tax Time Checklist Because April 15th falls on a Saturday this year, the actual filing deadline is April 17, 2006. Let this checklist be your guide as you prepare to file your 2005 taxes. ■ Do you have errors to correct from previous tax returns? You only have three years to file a 1040X Amended Tax Return. Be sure you file your 1040X for tax years 2002, 2003, or 2004 before filing your 2005 tax return. ■ Did you provide more than 50 percent of your child’s support during the year? You may be able to claim that child as a dependent, bearing certain conditions. ■ Did you fully fund your traditional, Roth, or spousal IRA for 2005? Currently, you can place up to $4,000 into any IRA you qualify for, plus an additional $500 as part of a “catch-up” provision if you are 50 or older. Contributions must be made by April 17, 2006. ■ Do you need more time to gather documents? File Form 4848, which provides a six-month (amended from the previous four-month) extension to file taxes. This is only an extension to file — you still must pay 90 percent of the taxes owed by April 17. ■ Have you reviewed your tax return? Even if you are using a paid tax preparer, be sure to check for mistakes. You could delay a refund or cause unwanted IRS scrutiny. Don’t make a costly mistake review your return thoroughly before submitting it to Uncle Sam. of offset retired pay for retirees with a VA rating of 50 percent or higher who do not qualify for CRSC. CRDP is phased in over several years, with increasing annual payments. Because it is a restoration of retirement pay, it is fully taxable at the federal level. However, if someone is medically retired with nontaxable retirement, CRDP will not be taxed. Retirees who qualify for both CRSC and CRDP may make an annual election of which program to participate in, choosing the one with the greatest economic benefit and tax advantage. It can be confusing, so get expert advice when in doubt. If you receive a backdated VA disability award, the Defense Finance and Accounting Service will not issue a corrected Form 1099-R, and you could end up overpaying your federal and state income taxes. The fix: File Form 1040X Amended Tax Return to adjust for any discrepancy created by a backdated VA award. Be sure to attach a copy of your VA award letter to the 1040X — and remember that you only have three years to amend prior returns. MO FEBRUARY 2006 ILLUSTRATIONS: MATT FOSTER/IMAGES.COM MILITARY OFFICER 61
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