Tax Toll on the Military

November 9, 2017

The Tax Cuts and Jobs Act is couched as a tax cut for many middle income Americans that saves each family an estimated average of $1,200 a year in tax obligations. While the tax bracket adjustments look favorable for the vast majority of servicemembers, a few critical tax advantages are slated to be cut. If enacted, a number of deductions up for repeal could chip away at meaningful tax benefits counted on by active duty servicemembers and veterans and their families. 

Considering the tax-preferred compensation packages and investment decisions that servicemembers tend to employ, some of the following provisions could uniquely affect servicemembers as compared to the average American civilian.

Repeal of deduction for moving expenses and exclusion for qualified moving expense reimbursement. By cutting moving expense deductions, servicemembers will be faced with paying taxes on the amount a PCS move costs as in-kind compensation, as well as any reimbursement received for do-it-yourself moves associated with PCS orders. The cost or reimbursement of an involuntary PCS should not be treated as taxable income.

Thanks to a quick response by advocacy groups including MOAA, House Ways and Means Chairman Kevin Brady (R - Texas) introduced an amendment this week preserving “the current law tax treatment for moving expenses in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order.” 

Repeal of the exclusion of gain from sale of a principal residence. Repealing this exclusion would augment the already existing disincentive for home ownership for active duty servicemembers. The legislation would lengthen the time requirements for principal residency such that servicemembers would not have any reasonable expectation of benefitting from tax-free gains on the sale of a home. 

Repeal of the deduction for alimony payments. Alimony would no longer be deductible for the person paying, but the spouse receiving it would be able to keep it tax-free. The provision would be effective for any divorce decree executed after this year and would not affect current alimony arrangements. Divorce rates in the military are trending lower, but the high-stress lifestyle continues to strain marriages to the point of separation. 

Repeal of medical expense deductions. The physical rigor of a military career creates a proclivity for long term health conditions for which prevention, diagnosis, treatment, equipment, and more are necessary. The medical expense deduction is an important factor in financial planning for low and middle income families and individuals with significant disabilities. According to the Leading Council of Aging Organizations, the average Medicare beneficiaries, including those who use TRICARE for Life, spend about $5,680 out of pocket on medical care, meaning removing this tax relief could have a big impact on taxable income. 

Reduction of mortgage interest rate deductions. While the mortgage interest rate deduction will remain in place as is for current homeowners, future home buyers who take out a loan will only be able to claim a dedication on the interest for the first $500,000 of the loan. The reduction might add just another reason for a current or former servicemember not to purchase a home. This factor, combined with the exclusion for gain of sale on principal residence and elimination of moving expense deduction, makes home ownership less desirable for a military member facing frequent moves. 

Repeal of the Work Opportunity Tax Credit (WOTC). The WOTC has been a critically important tool assisting in solving the problem of veteran unemployment. Department of Labor (DOL) statistics show 35,904 veterans were certified for WOTC during the three-year period before the Veterans Opportunity to Work Act. By contrast, 278,611 veterans were certified during FY 2013-15, an increase of more than 700 percent. 

Repeal of estate and generation-skipping transfer taxes. Many veteran-owned and -run businesses have faced the tough decision about selling out or passing the company down to the next generation of the family. The decision might have gotten much easier with this proposal to repeal the estate tax, alleviating a substantial tax burden places on the heirs to the business. 

Consider all of the tax advantages members of the uniformed services currently enjoy. Housing allowances, family allowances, health expenses, education allowances, death allowances, travel allowances, some special pay, and more are all excludable from gross income. Losing just a few of those could dramatically impact taxable income. 

The rationale behind eliminating deductions and exemptions is that it both simplifies the tax code and offsets the lost revenues from lowering individual and corporate tax rates. The GOP's original tax bill could cost $2.4 trillion in revenue over 10 years, according to the Urban-Brookings Tax Policy Center. While that seems like a lot to add to the national deficit, it is far less than it would have been had the bill writers not suggested removing the tax deductions and exemptions that are stirring up members of the military community. 

The conversation on taxes continues. The Independence Fund hosted a panel discussion on tax reform and the military community this week, inviting The Military Coalition (TMC) Tax Committee to share its perspective. Many of the Tax Cuts and Jobs Act provisions listed above came up in the discussion, providing an opportunity for many different parties in the tax reform debate to get a better understanding of the different opinions on changes affecting servicemembers. 

Much of the conversation focused on how the business tax rates could be beneficial for veterans who wish to start and grow their own businesses as a second career. Panelist Don Bramer, chair of the Bramer Group, explained 52 percent of small and medium manufacturing companies used for government contracts are veteran owned. That segment of the military community, for instance, could stand to gain from the proposed changes. 

Tax Toll

Congressman Robert Pittenger (R-N.C.) discusses the importance of the Tax Cuts and Jobs Act to open a panel discussion that included TMC Tax Committee cochair Mike Saunders (far left). 

Photo Credit: Forrest Allen/MOAA 

Following the panel discussion, White House staff invited participants to a briefing and discussion of many of the same topics. The military community's perspective is important to administration officials, who eagerly sought the group's input. The legislation is still up for debate with the House version in committee markup and the Senate version yet to be unveiled. 

“The tax impact on servicemembers hasn't been fully vetted as compared to the [impact on the] average American,” said Forrest Allen, MOAA's associate director of Government Relations. “The removal of tax-preferred compensations and itemized deductions risks significantly increasing servicemembers' taxable income, more so than a middle-class citizen in the private sector.” 

Every individual has a different tax scenario, but the increase in the standard deduction coupled with the lower individual and corporate rates might not make up for the increase in taxable income resulting from these proposed changes. If true, the military community will not support this legislation. 

With how much these deductions and exemptions benefit current and former members of the uniformed services, there is reason to second guess the estimated tax relief a servicemember would gain. MOAA is monitoring the tax bill progress and continuing to analyze the real impact of these changes.

 

 

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