Murphy’s LAW
An informal column about issues affecting the West Point Community

Commentary by Capt. Patrick Murphy
SJA

Well, it’s possible Jim Fox received coal in his stocking this Christmas for his inaccurate sports predictions and anti-Philadelphia tirades in 2001. I thought he may have even learned his lesson, because last week he picked the Philadelphia Eagles to win. But alas, this was all too good to be true, since today he has once again turned to the dark side in his weekly predictions. Maybe someone should tip him off that he should follow my football advice, this way he can expect to go 4-0 each week. Nevertheless, here are some tax tips that will give you an edge, much like the edge the Eagles will have this Saturday against the Chicago Bears.

An Early Start
Tax season has commenced with the IRS sending out 40 million tax booklets and forms to households across the nation. Its now time to start collecting your important documents. As of today, there are only 87 days until April 15. Make sure you have all W-2s and IRS Form 1099s (these forms identify income from interest, dividends, capital gains and distributions from pensions and IRAs).

If you recently moved to West Point and had non-military income at your prior residence, make sure the employer knows where to send your W-2 forms. You should also obtain documents that note unemployment compensation or other miscellaneous income. If you expect to claim an adjustment, credit or to itemize deductions, you should locate and total your receipts. Those who are eligible for childcare credit should make sure they have the employee identification number or Social Security Number for the care provider.

To claim a dependency exception and credit, your child must have a Social Security number. If your child needs a Social Security number, please contact Legal Assistance for guidance. Also, non-custodial parents will need IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) and a separation agreement or divorce decree in order to claim their child for tax purposes.

If you do not receive your W-2 form from your employer by Jan. 31 (this is the date required under federal law), contact your employer first. If that fails, you can contact the IRS at www.irs.ustreas.gov or phone at (800) 829-3676. Remember, if you had income in a prior duty location, you should contact your employer and provide a proper forwarding address.

Gross Income, TSP for uniformed services
Members of the Armed Forces fortunately receive different types of pay and allowances. Some are included in gross income, while others are excluded. Includible items are subject to tax and must be reported on your tax return. Excludable pay and allowances are not subject to tax, but may have to be shown on your tax return as it can effect other tax entitlements, such as Earned Income Credit.

The following items are excluded from gross income: special pay, quarters (BAH) and subsistence (BAS) allowances, family allowances, death allowances, child support, moving allowances and travel allowances. These exclusions apply whether the item is furnished in-kind or is a reimbursement or allowance.

Although not applicable for tax year 2001, a new item excluded from gross income, which for the first time is now available to military personnel, is the Thrift Savings Plan. TSP is a completely optional federal government-sponsored retirement savings and investment plan. The purpose of the TSP is to provide retirement income. Originally only for federal civilian employees, this year it has been extended to members of the uniformed services.  Uniformed service members will first be able to enroll in the TSP during a special open season which began in October and ends January 31, 2002.

TSP is defined as a contribution plan at www.tsp.gov.  The retirement income that you receive from your TSP account will depend on how much you have contributed to your account during your working years and the earnings on those contributions.

The TSP offers the same type of savings and tax benefits that many private corporations offer their employees under so-called "401(k)" plans.  In 2002, you can contribute up to 7 percent of your basic pay each pay period to your TSP account as soon as you become a member of the uniformed services.  If you contribute to the TSP from your basic pay, you may also contribute from one to 100 percent of any incentive pay or special pay (including bonus pay) you receive, up to the limits established by the Internal Revenue Code. With ‘’before-tax" contributions, the money you contribute is taken out of your pay before federal and, in almost all cases, state income taxes are calculated.  Thus, the amount used to calculate your taxes is smaller and you pay less in taxes now.  Deposits to a regular savings account do not provide such an advantage.

Your TSP contributions are excluded from the taxable income reported on the IRS Form W-2, Wage and Tax Statement, that you receive from the service each year.  Thus, you do not report them on your annual federal tax return.  This special tax treatment does not affect your salary of record for other federal benefits -- such as uniformed services retired pay -- nor does it affect Social Security or Medicare taxes or benefits.

Adjusted Gross Income and Three Specific Adjustments
Adjusted gross income is your total income minus specified deductions. These adjustments are called Above-the-Line Deductions. Although not as exciting as a Donovan McNabb scramble, there are three money-saving adjustments of particular interest to members of the Armed Forces. These are the Individual Retirement Account adjustment, moving expenses adjustment and a student loan interest adjustment. For purposes of contributions to a traditional IRA, members of the Armed Forces are considered to be active participants in an employer-maintained retirement program. Generally, you can deduct the lesser amount of the contributions to your IRA for the year up to a statutory limit. You have until April 15 to make a contribution to an IRA for your 2001 return. In fact, you can even file your income taxes before you make your IRA payment.

Some accounts, known as Roth IRAs, do not have tax-deductible features but receive special tax treatment when disbursements are made. You may wish to contact a financial planner to discuss which option is best for you.

Additionally, the value of moving and storage services, including dislocation allowances, temporary lodging allowances and move-in housing allowances, provided by the government in connection with a permanent change of station, are not included in income. However, if total reimbursements and allowances are more than your qualified moving expenses (as with most DITY moves), the excess is included in your wages on your Form W-2. Unreimbursed moving expenses can, however, be deducted. Use Form 3903 if your move was to or within the United States or Form 3903F if your move was outside the United States.

Lastly, taxpayers who have taken loans to pay the cost of attending an eligible educational institution for themselves, their spouse or their children may generally deduct the interest they pay on these student loans.

Whether you itemize or use the standard IRS deduction, you can use this deduction if you paid interest on loans taken out to pay qualified higher-education expenses. The deduction applies to interest payments made during the first 60 months that payments are due on the loan. The deduction has increased from $1,500 in 1999 to $2,000 in 2000, and now $2,500 in 2001. Taxpayers who were eligible for this deduction in past years can still file an amended return if they had failed to claim the deduction.

The interest deduction also applies to educational expenses for attending internship or residency programs that lead to a degree or certificate awarded by an institution of higher education, including hospitals and health-care facilities that offer postgraduate degrees.

Nevertheless, much like being excluded from the end zone by the Eagles tough defense, you may encounter some challenges. Your Adjusted Gross Income (AGI equals total income minus certain adjustments, such as alimony paid to a former spouse) must be $40,000 or less (or $60,000 if married and filing jointly) in order to claim the maximum interest deduction.

If your AGI exceeds these amounts, your deduction will be reduced. Also, if you are divorced, only one parent may claim the interest deduction. While there are a few challenges, this is definitely an opportunity worth taking from the IRS if you’re eligible.

Taxable Income
To figure your taxable income, you must subtract either your standardized deduction or your itemized deduction from your AGI. Most military tax filers who do not own a home will likely use the standard deduction.

If you itemize, you usually cannot deduct the expenses for uniform costs and upkeep, such as haircuts. Maybe this is why Jim Fox still has a goatee. But if military regulations prohibit you from wearing certain uniforms off-duty, you can deduct the cost and upkeep of those uniforms. However, you must reduce your expenses by any allowance or reimbursement you receive. Required-wear items that do not replace civilian clothing (e.g. insignia, epaulets, and swords) and are deductible. Also, you can deduct dues paid to professional societies directly related to your military position. However, this does not include amounts paid to the Philadelphia Eagles Fan Club.

You can deduct unreimbursed travel expenses only if they are incurred while you are traveling away from home. Home is your permanent duty station, regardless of where you or your family actually reside. To be deductible, your travel expenses must be work-related. You cannot deduct any expenses for personal travel, such as visits to family while on leave. Examples of deductible travel expenses include expenses for business-related meals, lodging, taxis, business telephone calls, tips, laundry and dry cleaning to the extent not covered by temporary duty allowances.

Charitable contributions can also be deducted if made to a qualified non-profit organization. These include travel expenses when using your POV to do charity work, which can be deducted by the actual expenses or a flat rate of 14 cents per mile. So, if you were a good soldier last year by helping fellow Eagle fan Father Vince Burns do charity work, it may help you tax-wise this year.

Lastly, after calculating your Gross Income, Adjusted Gross Income and Itemized or Standard Deduction, you have your Taxable Income (along with a headache). Remember, the West Point Tax Center is here to help you. If you need forms or publications, they can be found at the Tax Center, or you can contact the IRS by phone at (800) 829-3676 or www.irs.ustreas.gov.

Conclusion
As for your federal income tax, it is a necessary evil. Many of us will get significant refunds this year and that is always fun. Once the high-speed personnel in our Tax Center complete your federal income taxes, they can electronically file the return with the IRS and any refund will be sent to your specified bank account in a matter of days. The key is to start collecting the important papers and forms needed to accomplish this end-of-the-year task now. The West Point Tax Assistance Center opens Feb. 4. At that time, you can make an appointment by calling (845) 938-3372.