The LES and Itemized Deductions
Let’s look at some other areas of the LES. Military members get lots of different types of pay and allowances depending on their job, marital status, where they live and where they are assigned. Other than base pay, enlistment or special duty bonuses, most of these allowances are non-taxable. Of course, you are all aware that all combat and hazardous duty pay is also non-taxable. For the most part DFAS, the military pay system, is pretty good about getting these numbers right on the LES and the W2s, but it never hurts to check.
There are several items on the LES that affect the itemized deductions on a tax return. Let’s start with state and local sales taxes. We all know that as of today, at least, the itemizing taxpayer has the choice of taking a deduction for either the state income taxes paid or estimated sales taxes. How many of you know that you can increase your client’s formula-calculated standard sales tax deduction by making use of certain items on the LES?
Look at bottom part of the LES on the line titled “YTD Entitle”, this is the total income of all kinds the taxpayer received from the military. Now, look at box in the middle section of the LES titled “Wages YTD” which should match the W2 box 1. Quite a difference, isn’t there? The difference between these figures needs to be added to the total income calculation when figuring the estimated sales taxes. This will increase your client’s sales tax deduction, sometimes significantly. A lot of the software we use now will automatically add the combat pay marked by code Q on the W2 into this calculation already, so make sure you don’t double dip. Your equation should look something like this, (total income – Wages YTD Box on LES – W2 code Q, if any). This is the total income you need to add to your income for sales tax calculations.
While we are on the topic of sales taxes, how about the military member who purchases a car in Texas where he is assigned and then drives it home to Colorado where it is registered? You look at the sales papers and add the sales taxes to the calculations, right? Do you also look at the registration from Colorado to see if they paid additional sales taxes or personal property taxes when the got it registered in Colorado?
Let’s move to another section of the Schedule A, medical expenses. Most active duty folks are not going to have enough expenses to qualify for this deduction but, depending on their deployment status during the year, their AGI can fluctuate dramatically. So that 7.5% (10% starting in 2013) can be a lot lower if the military member was deployed all year and the spouse worked. Look in the 2nd column of the sample LES; this is where you will see all the different types of deductions taken out of the member’s pay. Especially if you are dealing with national guardsmen and reservists, there will probably be some insurance deductions. Most, if not all, of these will be post-tax and therefore eligible for deductions. Look for specific items like Dental or TRICARE listings. These are medical insurance expenses for the family members of the taxpayer. Also, ask them about any off-base co-pays and all the other normal medical expenses. You might be amazed at the number of military members and their families who are receiving some – if not all – of their medical, dental and vision care off base.
Next is something relatively new to the LES, charitable contributions. The LES has always shown deductions in the main body of the form under Allotments, but now we have a box, marked 3 on the sample LES; this gives us the member’s total contributions for the year. You will be surprised at the number of military members who forget that they are donating money through their paycheck every payday to various fund drives.
This covers most of the items that could affect the Schedule A on a tax return for a military member. Tomorrow we talk about credits and retirement contributions.