The bottom of the first page and the second page of the RAS has various areas for deductions, including the items mentioned below. One thing on the RAS that is pre-tax is the deduction for Survivor Benefit Program (SBP) Coverage. This is a deduction from the retiree’s pay that is set aside for the surviving spouse to receive after the retiree’s death. It is pre-tax because it is taxable to the surviving spouse.
The middle of the second page has a spot for Former Spouse Protection Act Deductions. This is a tricky area because it is not straightforward. In most cases, the amount is not included in the taxable income on page one, nor is it included on the 1099R since the former spouse receives a 1099R of their own. But, in some older divorces and divorces which occur in non-community property states this amount may be included in the taxable income, and should be deducted from the retiree’s income as alimony. If the Former Spouse deduction is taxable to the retiree it will not show in the Pay Item Description box under Gross Pay. This is the case where you would show an adjustment for alimony on the retiree’s 1040. The way this is reported changed several years ago, and some retirees have been “double dipping”, as the income is not reported on their 1099R (as shown on the RAS) but they “have always taken the deduction” and they are still taking the deduction as well. This is something for you to look for on your returns.
Another thing to look for on the Pay Item Description is the last three columns showing deductions from income. A lot of military retirees pay their health insurance through their retirement. This is always after tax and should be included on the Schedule A. Many retirees use their retirement to purchase savings bonds on a regular basis. So if your RAS shows savings bond purchases and your income documents don’t show any savings bond interest, you need to ask the client about having possibly cashed in any of his bonds. That leads to the whole “were they used to pay education expenses” conversation for the possible exclusion of interest income.
Speaking of education expenses, how many of you always ask your military folks with education expenses for themselves or their family members about funding sources? The active military, Guard, and VA offer numerous types of funding assistance for members and families. Don’t be fooled by that 1098T with nothing in the Scholarships/Grants box. Most funding goes directly to the member for them to pay the expenses themselves, plus many include on-going funding and stipends while in school to help with living expenses.
For example: My son, who is a member of the National Guard, has his tuition paid by the Guard. He is also the veteran of two tours in Iraq and has the post 9/11 GI bill through the VA which pays him a substantial living stipend while he is in school. The VA also pays his spouse a stipend while she is in school. Needless to say, they have no eligible expenses for the education credits. I can’t tell you how many military income tax returns I have amended to take the education credits off because the tax preparer didn’t ask the right questions; they just took the 1098T info directly off the form. And with the IRS’s new crackdown on the education credits, this will only increase. The taxpayer will not get any reporting documents from the military or VA on their education assistance, but you can bet the IRS has that info when they are looking at returns.