A Rant About Taxes and the Military

The below was a position paper that I wrote over a year ago that still has valid points. I assume that even in this economy, many of the below tax breaks will be extended, but that still doesn't mean that all military personnel shouldn't be monitoring this topic.

One of the single greatest monetary benefits to the American Service Member in the last 15 years is not any of the many targeted pay raises that have been enacted, but the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), that unless permanently enacted into law, will expire after the 2010 tax year. For many Service Members this act, while they may not have realized it, has reduced their federal income tax rates and created a new, lower, tax bracket while establishing (and subsequently increasing) the Child Tax Credit (Esenwein, 2005).

The creation of the 10 percent tax bracket for eligible tax payers has affected many Service Members by simply reducing their tax liability from 15 to 10 percent, particularly families with children. Prior to the EGTRRA, the lowest tax bracket for a taxpayer was 15 percent. Unless Congress acts to make these changes permanent, the tax brackets will revert to the 15 percent level in tax year 2011. For the tax year 2007, the 10 percent tax bracket will be applied to tax payers whose taxable income is less than $12,000 for the tax year 2007. That may seem like a very paltry sum, but one must keep in mind that the taxable income is derived from taking one’s adjusted gross income, subtracting either the standard deduction or itemized deduction, and then subtracting an additional amount derived by multiplying the total number of exemptions by a dollar figure given by the IRS ($3,400 in 2007). To put this in context, a CW2 in the Army stationed overseas, grossed just over $85,000 in income for the 2007 tax year (to include moving expenses and COLA for two locations) and ended the year with an AGI of $41,369. After the standard deduction and the deduction for the eligible exemptions, that CW2 has a taxable income of $10,269 which produced a tax due to the IRS of $1,024. Without this tax bracket, this CW2 would have faced a tax liability of about $500 more, and again, this tax bracket will disappear if not enacted by the 2011 tax year.

Possibly the most significant adjustment of the EGTRRA to military families, particularly large military families with more than two children, was the establishment of the Child Tax Credit. The Child Tax Credit was scheduled to fluctuate from $600 to $1,00 over nine years until Congress passed the Working Families Tax Relief Act of 2004 to set the Child Tax Credit at $1,000 per qualifying child through 2010 (The Child Tax Credit, 2007). Simply put, the Child Tax Credit reduces the amount of tax that a taxpayer owes by $1,000 per child. Many military members, particularly lower ranking officers and enlisted soldiers, have benefited tremendously by having this tax credit, but this law goes even further. If a taxpayer filing their tax return uses all of the amount allocated for their qualifying children as a tax credit, then the remaining amount is refunded to them in the form of the Additional Child Tax Credit. This IRS describes the Additional Child Tax Credit like this: “This credit is for certain individuals who get less than the full amount of the Child Tax Credit. The Additional Child Tax Credit may give you a refund even if you do not owe any tax.” (IRS Pub 972, 2007) While the amount being refunded is not colossal, it directly affects thousands of military families through the grade of E-5 and many above that. This is a way that the American Taxpayer, without even realizing it, helps to contribute to the income of Military Service Members. Just to emphasize the importance on military families, if we take the same CW2 used in the above example, after calculating in credits for education, his total tax for the 2007 tax year is zero dollars. The Additional Child Tax Credit will kick in and he will be refunded $1,000 for each qualifying child, plus he will be refunded all of the money that he contributed during the 2007 tax year. That comes to a total refund of over $4,500 for a family of six that had an adjusted gross income of greater than $45,000. Can you imagine in impact on a family of a young Sergeant or even a Specialist or below when the tax refund would be almost identical?

One of the most unpublicized benefits of the EGTRRA changed the definition of earned income and eliminated the use of modified adjusted gross income to measure eligibility for the earned income Tax Credit (Parker, 2002). In simpler terms, prior to the 2002 tax year when a Service Member sat down to calculate if they were qualified for the Earned Income Tax Credit, they needed to perform a separate calculation to include their housing allowance, clothing allowance, sustenance allowance, etc… That little known addition part of that one tax act made lives considerably easier for thousands of American Service Members and their families and was the right thing to do. Making the above changes permanent and keeping them at a minimum at their existing levels will benefit millions of Americans, but as a Soldier I am proud to say that it will affect many Service Members as well and that’s why Congress needs to do this.

Since these tax breaks do not apply specifically to the military and of course have far reaching effects, they are predicted to cost a substantial amount of money. In addition to helping a substantial number of military members, there were significant savings in the EGTRRA that benefited the top 1% of wage earners (Gale & Orszag, 2004). There needs to be a line and congress needs to find it. The benefit to those tax payers with taxable incomes of less than $12,000 should not be withdrawn. There are ways to make this happen and whoever is seeking the vote of any military members, whether they are running for congress or for the president of the United States, needs to be aware of how important these cuts are to the American Service Member.

Bibliography
Esenwein, G. (2005, Mar 4). CRS Report for Congress. Retrieved Mar 8, 2008, from kuhl.house.gov: kuhl.house.gov
Gale, W. G., & Orszag, P. R. (2004, Mar 8). Tax Analysts - Tax Break. Retrieved Mar 9, 2008, from Brookings.edu: https://www.brookings.edu/views/articles/gale/20040308.pdf
IRS Pub 972. (2007). Retrieved Mar 9, 2008, from IRS.gov: http://www.irs.gov/pub/irs-pdf/p972.pdf
Parker, C. A. (2002, Jun). Earned Income Credit: new rules could ease qualification - military taxpayers. Retrieved Mar 9, 2008, from BNET Business Network: http://findarticles.com/p/articles/mi_m6052/is_2002_June/ai_90926492/pg_1
The Child Tax Credit. (2007, Feb 10). Retrieved Mar 9, 2008, from About.com: http://financialplan.about.com/cs/taxes/a/ChildTaxCredit.htm