If you deployed to a combat zone this year you may have a unique opportunity to get a larger than normal tax refund next year. You might even be able to get a refund larger than what you had deducted from you paycheck. How is that? It involves the Earned Income Tax Credit (EITC).
The EITC is a tax credit that has been around for quite a few years…back to the seventies in one form or another. The purpose of the EITC is to help low to moderate earners. The IRS says its purpose is to provide an incentive to work by helping to defray the costs of Social Security and Medicare taxes paid by all wage earners. The EITC is substantial too. The maximum EITC is $5,891 and since the EITC is a refundable credit you could get that amount back even if you had zero withheld from your military pay and owe zero tax.
Not everyone will qualify for the EITC. Here are some of the criteria:
- The taxpayer must have less than $3,200 in investment income
- The taxpayer must have Earned Income
- The taxpayer must be at least 25 and younger than 65
- The taxpayer can not file as Married Filing separately
- The taxpayer’s Earned Income must be below certain limits. The limit which varies depending on circumstances could be as high as $50,270 or as low as $13,980 (projected 2012 numbers)
As mentioned above the credit can be substantial. The 2012 projected maximum credit amounts are:
- $5,891 for 3 or more qualifying children
- $5,236 for two qualifying children
- $3169 for one qualifying child
- $475 for no children
One other thing to keep in mind with the EITC is it starts low at low income levels; then increases as income increases and levels off on a plateau; it then decreases with increasing income until reaching zero at the income limits listed above. This is an important point.
So, what does this all have to do with Combat Pay? Combat Pay is not included in a military members income on the W-2 and it is not taxable. But in a rarity for the IRS, a military members is allowed to decide to include or not include Combat Pay when calculating the EITC. All or none of Combat Pay must be included in the calculation but regardless of the decision the Combat Pay will not be included as taxable income.
You can use this option to your advantage as follows:
- If you are an Officer or Senior NCO most likely you will want to exclude your Combat Pay from the EITC calculation. Depending on how much of the year you were deployed in the combat zone your Earned Income may be low enough to qualify for some or all of the EITC.
- For those more junior, including Combat Pay in the EITC calculation may actually increase your refund (remember the plateau). Again, it will depend on your rank and how long you were in the combat zone.
No one is required to pay more tax than what is owed and there is nothing unpatriotic about reducing your taxes. If you deployed to a combat zone in this year for an extended time the odds are favorable that you will be able to qualify for the EITC when you file next year. Don’t miss the opportunity.