Continuing our discussion on the Military Leave and Earnings Statement (LES) and how it can help your clients. Today we are going to talk about credits you may be missing for your military clients and retirement contributions.
The LES and Credits
As you know, for the most part, military members do not contribute to their own retirement. However, there is a Thrift Savings Plan (TSP) option, the government version of a 401K, to which members can voluntarily contribute. This is also reported on the W2 in box 12 code D or box 14 code E. This line will not usually have a direct effect on the current year’s tax return, as they are already deducted from Box 1 of the W2, unless your client was deployed to a combat zone while making these contributions.
In the middle of the LES the section marked TSP shows the differing characteristics of the TSP program contributions. The box marked “TSP YTD Deductions” shows the total actual contributions year to date. The box marked “Deferred” shows the amount of those contributions that are deferred; this is because the taxpayer made contributions just like any 401K type contribution. The box marked “Exempt” shows the total the member has contributed this year that came from exempt combat pay or allowances. Unlike regular TSP contributions, which are pre-tax and fully taxable on distribution, these contributions are not taxable on distribution and are considered a basis in the TSP. So your clients need to be aware that they may be able to exempt some of his distributions when he takes them out. These contributions are prorated out anytime there is a distribution and can not be specifically designated as a withdrawal rather like taking distributions from a traditional IRA with a basis.
The TSP administrators are very good at keeping this information in the account files and will usually have the 1099R correct but, as with anything relating to taxes, the more you and your client knows, the easier it is to detect an error and get it fixed. This section is also a good place to double check the amount to put on the form 8880, Retirement Savers Credit. Your client deserves the maximum amount for all his contributions and you can use the exempt amounts. Please double check the amount in the box marked “TSP YTD Deductions” against the number in box 12 and 14 of the W2.
Various types of military pay and allowances also affect other credits on the tax return. Combat pay (Code Q on the W2 box 12) can be added – or not – to the EITC calculation, whichever gives the bigger credit. But, a word to the wise: if you add any combat pay to the EITC calculation, you must add it all – you can not “cherry pick” a given portion to make the credit max out. The combat pay exclusion also helps with the Child Tax credit and Additional Child Tax Credit calculation. Combat pay is added back into the earned income for calculations purposes but does not affect the AGI phase out of the credit. Combat pay also can be added to the earned income calculations for IRA deductions and contributions but does not affect the phase-out of the credit.
We are done with the LES and tomorrow we plunge into tthe reporting documents for retired military members.