While 2020 may be behind us in some ways, there’s still the matter of filing those 2020 tax returns, and there are, of course, some COVID twists to taxes.
First, some basics: As of Feb. 12, the Internal Revenue Service began accepting tax returns. Taxes are due April 15.
Susan Mitchell, executive director of the Armed Forces Tax Council, advises service members to file their taxes electronically, and choose direct deposit. “By electronically filing, it catches a lot of math errors, and direct deposit means that any tax refund is deposited directly into the taxpayer’s financial account, and that’s certainly a lot quicker,” she said.
The IRS doesn’t answer inquiries about refunds until at least 21 days after the tax return was filed electronically. You can check on the status of your refund on the IRS website’s “Where’s my refund?” page, found at https://www.irs.gov/refunds.
Take advantage of free, professional, military-specific tax preparation help that’s offered by DoD and the services. There are fewer tax centers operated by legal assistance offices on bases this year because of COVID, but you should check to see if this free tax preparation service is available at an installation near you, at https://www.militaryonesource.mil/vita-location-lookup/. These IRS-trained volunteers have training in military-specific tax topics and situations, such as extensions and deadlines while serving in a combat zone, and how new tax laws may affect the military community. The service is open to active-duty members and their families for free, and to retirees when space is available. The Defense Department also offers free tax preparation and filing software through MilitaryOneSource.mil, and tax consultants trained in military tax issues who are available for free, any time.
COVID and taxes
There are some COVID-related aspects affecting taxes that will be of interest to service members and their spouses, said Mitchell.
*Unemployment compensation. Many military spouses are among the millions of people who received unemployment compensation in 2020 because of layoffs or furloughs. Those unemployment compensation benefits are taxable. “While many of these taxpayers could have elected to have federal taxes withheld from their unemployment or make estimated tax payments, what I have found is that many just don’t take those options,” she said. “In that case, taxes on those benefits are going to have to be paid when they file that 2020 tax return.”
*Taxable interest on 2019 refunds. Some taxpayers who received a refund on their 2019 tax return also were paid interest by the Internal Revenue Service, which is the result of the pandemic-induced postponement of the tax filing deadline. The IRS will send a form 1099-INT to anyone who received interest totaling at least $10. “But the important thing for folks to know is that that 2019 refund interest payment is taxable, and taxpayers have to report that interest on their 2020 federal income tax return,” Mitchell said.
*Charitable contributions. The vast majority of taxpayers, to include service members and their families, take the standard deduction, Mitchell said, and they normally can’t claim a deduction for charitable contributions. But for 2020, the CARES Act allows people to claim a limited deduction — up to a $300 monetary contribution — even if they take the standard deduction and don’t itemize. This doesn’t apply to donated property such as clothing and furniture.
*Teachers. Military spouses who are teachers should know that teachers can deduct their out-of-pocket expenses for COVID-19 protective items that were paid or incurred after March 12, 2020. These educators can qualify for up to $250 of qualifying expenses for items such as face masks, disinfectant for use against the virus, hand sanitizer, disposable gloves, tape, paint or chalk to guide social distancing, any kind of physical barrier, or air purifiers. “There are several items recommended by the [Centers for Disease Control and Prevention] for protections against the virus. I would advise military spouses who were teachers to take a look at this list and see what they might be able to deduct as unreimbursed expenses,” Mitchell said. For more information, visit https://www.irs.gov/newsroom/educators-can-now-deduct-out-of-pocket-expenses-for-covid-19-protective-items.
*Economic Impact Payments. Most people have received two rounds of Economic Impact Payments, also known as COVID relief stimulus payments. Those who haven’t received a payment, or didn’t receive the full amounts, may be able to claim the Recovery Rebate Credit on their 2020 tax return. That first payment was $1,200 per person, $2,400 for married filing jointly, and $500 for each qualifying child. Later in the year, the payment was $600 per person, $1,200 for married filing jointly and $600 for each qualifying child. The payments were reduced for those with incomes above various levels. For further information, visit the IRS website at https://www.irs.gov/coronavirus/get-my-payment.
*Social Security tax deferral. First of all, federal and state income taxes aren’t affected by this deferral. The deferral happened from September through December for military members because of an executive order signed by then-President Donald Trump requiring temporary deferral of Social Security taxes normally withheld from paychecks. Now, those people are repaying those deferred taxes, which are being collected from their paychecks through the end of the year. Employees affected by this deferral will receive a Form W-2c (Corrected Wages and Tax Statement) for tax year 2020 after the full amount of deferred taxes has been collected, likely in January 2022, according to the Defense Finance and Accounting Service.
Generally, if you had only one employer in 2020, you won’t have to file an amended tax return when you receive the Form W-2c in 2022.
Some other reminders for military taxpayers:
*Unreimbursed moving expenses. Unlike civilians, military members can still deduct certain unreimbursed moving expenses related to Permanent Change of Station moves. Don’t deduct any expenses for services that were provided by the government; or expenses that were reimbursed by an allowance you didn’t include in income.
While DoD covers most of the expenses for service members when they move, there may still be some unreimbursed expenses. During the pandemic, lawmakers amended the Servicemembers Civil Relief Act to allow service members to terminate a housing or vehicle lease agreement without a 30-day notice if the need is due to a Defense Department stop-move order. That provided relief to some service members who were forced to pay rent on two residences. In many cases, families have moved their household goods themselves, and in the latter half of the year, the government began paying service members doing a personally procured move 100 percent of the amount equal to the estimated cost of what the government would pay to move those items.
Use IRS Form 3903 if you want to deduct unreimbursed moving expenses. For more information, visit https://www.irs.gov/taxtopics/tc455, and IRS Publication 3, https://www.irs.gov/pub/irs-pdf/p3.pdf.
*Capital gains taxes for military homeowners. Taxpayers can generally avoid paying capital gains taxes on the sale of their home, as long as they’ve owned it and used it as their qualifying principal residence for at least two of the five years preceding the sale. The amount of profit that can be excluded from taxes is $250,000 for single taxpayers and $500,000 for married coupled filing jointly.
But military members get an extra benefit — extending that time period by up to 10 years, for a total of 15 years, if they’re assigned to a duty station that’s at least 50 miles away from the house for a period of 90 days or more.
“It’s a huge benefit for these service members who are moving around a lot and may not be able to necessarily sell their residence before they move, and so instead, they hang onto the house and hopefully rent it out,” Mitchell said. This extra benefit means the service member may not have to pay taxes on the profit up to those excluded amounts, if the residence has been their primary residence for at least two of the previous 15 years.
Karen has covered military families, quality of life and consumer issues for Military Times for more than 30 years, and is co-author of a chapter on media coverage of military families in the book "A Battle Plan for Supporting Military Families." She previously worked for newspapers in Guam, Norfolk, Jacksonville, Fla., and Athens, Ga.