Military Officer - February 2008 - (Page 52) 1 2 For 2007 tax returns The clock is ticking on the Heroes Earned Retirement Opportunities (HERO) Act: Signed into law May 29, 2006, this act allows servicemembers in combat zones to treat non-taxable combat pay as earned income for purposes of contributing to an IRA. This law is retroactive for two years — covering those deployed in combat zones (and qualified contingency operations) in 2004 and 2005 — and allows deductible IRA contributions of $3,000 for 2004 ($3,500, if 50 or older that year) and $4,000 for 2005 ($4,500, if 50 or older that year). However, qualifying servicemembers only have until May 29, 2009, to file an amended return and claim this benefit. Tax tactic: If you qualify, this is a great way to increase your retirement savings retroactively, so double-check your records. 3 Receipts for charitable contributions in cash: One of the most unwelcome provisions in the Pension Protection Act of 2006 is you now must have a bona fide receipt for all cash charitable contributions you deduct, whether it’s a weekly $20 bill for the collection plate at church or $5 in the Salvation Army kettle. Keeping a log of gifts won’t help — the IRS has to see an actual receipt. Tax tactic: Consider making all gifts by check or see about setting up an automatic bank draft if it is a charity you routinely support. Be sure to request a summary receipt at the end of the year. Most charities are happy to comply. Tax-Time Checklist: 2007 Filing Deadline: Tuesday, April 15, 2008. You can get an automatic six-month extension to file by completing Form 4868, but this does not provide additional time to pay. All taxes due should be paid by April 15, 2008, to avoid late penalties and interest. You have up to three years to file an amended tax return (Form 1040X). File an amended return for tax years 2004, 2005, or 2006 prior to filing your 2007 taxes. If you qualify to make contributions to a traditional, spousal, or Roth IRA, do so before filing your 2007 taxes. Contribution limits for 2007 are $5,000 a person, plus an additional $1,000 if you turned 50 in 2007. Parents and children in college don’t have to live under your roof to be considered dependents. Baby boomers now are providing support for elderly parents and might be entitled to claim their parents as dependents if they provided 50 percent or more of their parents’ living expenses in 2007. Review your return before submitting it to the IRS, even if you’re using a paid preparer. Common problems, especially for paper returns, are missing signatures and incorrect Social Security numbers. 52 MILITARY OFFICER FEBRUARY 2008 Combat-Related Special Compensation (CRSC) and Concurrent Retirement and Disability Pay (CRDP): Know the difference between CRSC and CRDP and which is taxable. CRSC provides additional disability compensation for retirees with VA ratings of 10 percent or more caused by combat or combat training, provided the retiree applies to his or her service for CRSC and is approved. CRSC payments are non-taxable. CRDP payments eventually will be automatic for all retirees with VA ratings of 50 percent or higher and are subject to a phased-in increase over the next several years. Because these payments are a restoration of retired pay, they typically are fully taxed at the federal level and taxable at the state level (if your state taxes military retired pay). Retirees who have received a backdated VA disability award or an increased rating (a very common occurrence) might have overpaid federal income taxes because of that VA disability compensation/military retired pay offset. If you receive a backdated award, the Defense Finance and Accounting Service will not issue you an updated 1099-R form, so you will need to file an amended tax return (Form 1040X) and manually adjust your military retired pay to the proper amount. Attach a cover letter and a copy of your VA award letter to justify the adjustment. Remember, you only have three years to file an amended return, so act quickly! Tax tactic: A servicemember who qualifies for both programs annually can choose the program that provides the most economic benefit, keeping in mind CRSC payments are non-taxable and CRDP payments usually are taxable. Generally, CRSC will pay more initially, but CRDP payments might surpass CRSC payments within five or six years. [CONTINUES ON PAGE 53]
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