Reenlistment Bonus, Social Security, Compensation Repayment and Taxes

I have a LOT more good information for you in The Short Cheap Tax Book for the Military.

If you received income, that you thought you were entitled to, like Military Bonuses, VA payments, AFLAC type income replacement, Social Security and many others, and you paid taxes on it, and THEN someone took it back, you are entitled to get the taxes you paid on it back (sort of):

Each year that you pay back taxed money (they will garnish wages and take tax returns - FYI) you will be able to claim that on your tax return for the current year.

They will send you a letter detailing the amount they took for the year (maybe - you should track the amount they take to the dollar, just in case.)

With this you can do a "Claim of Right" deduction or credit.

If the amount is less than $3000, it is an itemized deduction (which sucks if you don't itemize).

If the amount is more than $3000, you can either take the deduction above, or a credit for the taxes paid on the original tax return, whichever is better.

The credit gets complicated and will require a fair amount of record keeping if you repay over multiple years.  Essentially you will recalculate the tax return for the year of the bonus, and figure out the taxes you paid on money you repaid.  You then get that amount back on the current year's tax return.  It's refundable, so you will get the money no matter what.

I strongly encourage ensuring that in any year they take money that you pay at least $3000. This is the only way to be sure to get all the taxes you paid back.

Each year you do the credit, you have to refigure the tax return including the changes from any previous credit calculations.

Make sure you find a copy of your tax return for the year of the bonus.

You can get a transcript from www.irs.gov by setting up an account or having them mail you one.  The transcript is all you should need, so don't get the full copy since that can cost money.  Here's a direct link to the right page: TRANSCRIPT

Each state handles claim of right in their own way, so you might need assistance with the State.

Everyday Taxes

My book is finished and just needs verification that numbers are current.  Expect availability for e-readers by December and physical books soon after.

Available!!!!

If you like the blog, buy my book: Everyday Taxes only $5.99 for Kindle!  Paperback $11.99 or less!

Open a Roth IRA Today! And Not For the Reason You Think

If you like the blog, buy my book: Everyday Taxes only $5.99 for Kindle!  Paperback $11.99 or less!

This article is not about Roth IRA's in detail.  It's about one little, under appreciated rule about Roth IRA's.  Many of the requirements for avoiding taxes and penalties on Roth IRA withdrawals involve a five year rule.  You have to have a Roth IRA for at least five years in order to take advantage of many exceptions.

The weird thing is that the rule isn't based on individual Roth IRA accounts, it's based on the first time YOU opened ANY Roth IRA account.  So, when you're starting out investing, throw a little money into a Roth IRA, just to get the clock started.  It doesn't have to be much, and, to be honest, it will probably not actually matter in the long run, but, if it does, you'll be happy you did it.

Obviously this should not be interpreted as investment advice, or an argument as to what IRA is better for you.  It's just a little helpful hint that has a small chance of saving you some grief someday.