(This article originally appeared in the July 2022 issue of Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)
Note from MOAA: This is the second installment of a two-part series on mid-year tax moves. Click here for the first part, which includes guidance on retirement planning and charitable giving.
Track medical expenses. If you have some big medical bills this year or will be making accessibility changes to your home, you might be able to itemize and deduct these expenses. You can deduct only the amount of your total medical expenses that exceeds 7.5% of your adjusted gross income in 2022. See IRS Publication 502, “Medical and Dental Expenses,” to learn more about the expenses that qualify.
Deduct interest and taxes. Homeowners who itemize can deduct part or all of their mortgage interest and property taxes. Under current rules, interest on mortgages of up to $750,000 is deductible. Interest on home equity loans is deductible if you use the money to buy, build, or substantially improve your home; the interest isn’t deductible if you use a home equity loan for personal expenses.
The state and local tax deduction is capped at $10,000 for 2022. Property taxes are subject to that cap.
Deduct moving expenses. Civilians can’t deduct moving expenses, but people moving for military service still can.
“Only military moves are tax deductible,” said Jo Willetts, director of tax resources at Jackson Hewitt. You can deduct unreimbursed expenses if you are on active duty and your move is due to a military order and the result of a PCS.
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Take the home office deduction. If you are self-employed and have a dedicated home office space, you may be eligible to take a home office deduction. Those with side gigs may qualify for a deduction on their self-employment income. You can figure the deduction by either using a calculation with actual expenses or the simplified method, which has a rate of $5 a square foot for business use of the home with a maximum deduction of $1,500.
Keep receipts for home improvements. The cost of home improvements can be added to your home’s basis; the higher the basis, the less in potentially taxable profit you may have when you sell a primary home.
Generally, homeowners who lived in their home for two of the last five years can exclude up to $250,000 in home-sale profit for single filers, and up to $500,000 for joint filers. Any excess is a taxable capital gain. Military servicemembers can get a break on the ownership and use tests if they have been on qualified official extended duty.
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Harvest tax losses. With significant market volatility, you may have some losers in your investment portfolio. The good news is that capital losses can offset capital gains and up to $3,000 in ordinary income. “If you have losses to take, take them to sterilize any gains you might have,” said Col. Dr. Steven Podnos, USAFR, CFP®, principal of financial firm Wealth Care.
Consider harvesting losses when rebalancing your portfolio. Just be mindful of the wash-sale rule, said Bronnenkant. You disqualify the deductibility of your loss if you sell an investment and repurchase it within 30 days of the sale.
Take advantage of the 0% rate. Investments held for more than a year qualify for capital gains tax rates. The star of those attractive set of rates is the 0% tax rate that applies to single filers with taxable income up to $41,675 and joint filers with taxable income up to $83,350 for 2022. The higher capital gains tax brackets are still favorable, at 15% and 20%, depending on taxable income.
While you need to be careful rebuying similar investments when you sell at a loss, there is no such worry when selling at a gain. You could sell a long-term investment to pay a 0% tax rate on its gain, and then turn around and buy the same investment back, giving you a new, higher basis for whenever you sell those new shares.
All these moves may not apply to you, but you can mix and match those that do. By doing at least a mid-year status check on your tax situation, you give yourself time to make adjustments.
“If you have any surprises at the end of the year, you want to get surprised and get more money,” said Willetts.
What’s Your State’s Report Card?
MOAA has assessed each state's taxability of military retired pay and survivor benefits, as well as whether states have enacted legislation addressing servicemember and military family issues. For a limited time, all MOAA members can access MOAA’s State Report Card and Tax Guide.