How to Deal with Special Tax Considerations
When major changes happen that affect your income or your assets — such as the death of a family member or the pending start of college — the last thing you want to consider is taxes. However, you can save yourself a huge headache, and possibly some money, by understanding the taxes surrounding those special circumstances.
As your first step to address your specific situation, take advantage of MilTax, Military OneSource tax services, which provides free tax consultations from experts trained in spotting deductions and allowances specific to service members and their families. MilTax also offers free tax prep and filing software that is tailored to military life. Contact MilTax at 800-342-9647.
Military survivor benefits and tax forgiveness
When someone dies, the Internal Revenue Service requires a final accounting. It is up to the surviving spouse or the executor of the will to file the paperwork, submit a tax return and send in a survivor's claim if applicable.
As the survivor, check if you can access certain tax benefits. A MilTax professional can help you with that. For instance, the Internal Revenue Service may forgive or refund the amount the service member pays in taxes each year if the service member dies under certain circumstances:
- while on active duty in a combat zone,
- from wounds, disease or other injury received in a combat zone,
- from wounds or injury sustained in a terrorist or military action.
Tax forgiveness is not automatic. But if you meet the criteria, submit a claim for credit or refund. You must submit the claim within a certain timeframe. You also will need to attach proof of death, a statement that the individual was a U.S. employee on the date of the injury and on the date of death, and confirmation that the service member died because of military or terrorist activity.
If you usually file a joint return, the Internal Revenue Service only considers the decedent's part of the income tax for forgiveness. Talk to your tax advisor about your specific tax claim.
Understanding inheritance tax issues
When you inherit money or assets, take steps to navigate complicated tax rules and protect yourself and your inheritance.
- Get a probate lawyer within two weeks of the death to make sure you make all important deadlines. You also may want to talk to a financial advisor to maximize any benefits or decide what to keep or to sell.
- Secure your new assets. Place cash in a low-risk money market fund or CD. Lock up paper stock certificates and valuable jewelry in a safe deposit box. Tell your insurer about the new assets that may need to be covered. Keep several copies of the will and trust documents, asset inventory and value, and the death certificate.
- Consider all tax obligations before you plan your spending. Inheritance taxes are high. And, while the estate of the deceased usually is responsible for paying the deceased's debts before offering you your inheritance, make sure that you have no legal obligations. Speaking with a tax consultant is always a good idea. Visit MilTax or call 800-342-9647.
- Reach out to your installation's personal finance management program via the Military and Family Support Center or use Military OneSource's free financial counseling. Also, check out the Military Financial Readiness Program offered by the nonprofit FINRA Investor Education Foundation.
Understanding college tax breaks
Another event that can clobber you financially is planning to send yourself or someone else to college. College can be a substantial financial investment, but examine the many education benefits offered by the military. Get a Military OneSource educational consultation by calling 800-342-9647.
The IRS also offers some education tax breaks that may alleviate some of the pain. There are three main sources of tax savings on college expenses:
- Tax credits. If you pay college expenses for yourself, your spouse or your dependent, you may qualify for an education tax credit. A credit will reduce the amount of federal income tax you owe and even allow for a refund. See if you qualify for one of these two education credits: the American Opportunity Tax Credit or the Lifetime Learning Credit.
- Tax deductions. Deductions are valuable because they can reduce the amount of your income subject to tax. Use Form 8917 to apply for a tuition and fee deduction, which sometimes can result in solid savings. Other deductions to consider include student loan interest deduction, qualified student loans, qualified education expenses, business deductions for work-related education, qualifying work-related education, education required by employer or by law, and education to maintain or improve skills.
- Savings plans benefits. Certain savings plans allow the accumulated earnings to grow tax-free until money is taken out, or they allow the distribution to be tax-free, or they do both. 529 plans and a Coverdell Education Savings Account are two examples.
Life is full of change. Sometimes that change comes with tax implications. With MilTax by your side, you can quickly take steps to address any tax issues so you can focus on the more important stuff.