Thinking outside the (tax) box

Q: This will be my first year filing taxes as a married man and I’m confused about how I should file—married filing jointly or separately.  I completely trust my wife, and know her financial liabilities/health.  My question is based more in the military venue.  I am currently stationed in Iraq, and therefore my income is tax free.  My wife is working as a server (waitress).  Her taxable income (approx $40k) will be quite a bit more than mine.  Would it make more financial sense to file jointly, or separately?

-Joshua, in-the-box

A: Congratulations on your marriage and thanks for all you are doing over there in the sand, wind, cold and heat.  In most cases, filing jointly makes the most sense…and dollars!  Since you’re a couple now, the goal is likely to pay as little in taxes as possible. 

To illustrate your scenario, I’m going to assume that you have no children, do not itemize, you were in a tax-free combat zone throughout the entire year and that you and your wife did have adjusted gross income of $40,000 (including dividends, interest, and her wages).  In this scenario, if you file jointly, your total federal income tax would be around $2,300 (that takes into consideration the standard deduction and personal exemption).  On the other hand, if you both filed separately you would have zero tax, but she would owe around $4,300.  So, if you want to keep momma happy and do what makes the most sense for you both it appears filing jointly probably is the way to go.  There are a few instances when it makes sense to file separately.  One example would be if one of you had extreme health expenses that exceeded 7.5% of that person’s income.  As with all things tax-oriented, seek advice from a tax advisor or CPA.  He or she can prepare your returns both ways and see what makes the most sense based on the specifics of your situation.  Thanks for a great question!

The preceding discussion is not tax advice. Consult with your tax professional regarding your specific situation.

Retiree spousal benefits

Q: As an Air Force retiree and divorced, will my new spouse be eligible for retired benefits, such as an ID card and medical care?

-Joe, Europe

A:  Joe, sign her up!  Your new spouse will be eligible for medical benefits after you register her in the Defense Enrollment Eligibility Reporting System (DEERS).  This registration will also allow her to get an ID card.  Don’t forget to check out your options when it comes to the Survivor Benefit Plan (SBP).  Remember, I'm a big fan of that program!  On the SBP front, your options will depend on what happened during your divorce.  Assuming your former spouse is not covered, you have up to one year to contact DFAS to update or change your old election, otherwise your old coverage and premiums will apply to your new spouse.  If the divorce decree provides for SBP coverage for your ex-wife, then your new spouse is out of luck.

Splitting military retirement can be complicated

Q: My ex-husband entered the active army in 1973. We were married in 1974. He was active duty for 3 years; from 1976 to 1995 he was in the reserves. In 1995 he went into the AGR and is planning to retire in 2013 as an O6 with an active federal retirement. We were divorced in 2007 after 34 years of marriage. Our divorce decree states that I am to get 50% of the retirement he earned while married plus SBP. I am on track with all the paperwork according to the Former Spouse Division in Cleveland DFAS. My question is, how can I calculate what my monthly check will be in 2013 so I can work with my financial planners?

-Sandra, Wester, Ohio

A:  That’s a very good and forward-thinking question. Unfortunately, you have not provided enough information for me to provide an accurate estimate. If we assume 26 years of active service (21 on Active Duty or AGR and 5 equivalent years from his time in the reserves), O-6, and 3% inflation, his monthly retirement pay check in 2013 will be approximately $7,000. You can use the calculator at the Office of the Secretary of Defense website to determine his retired pay. 

However, for you, the more important question is how much will your benefit be worth and how will it be calculated? You need to head back to your attorney to clarify the answers to these questions. It’s more complicated since you were married both during reserve and active duty service. It almost seems as if your divorce decree was written purely for reserve retirement (in which points determine retirement benefit and points earned while married divided by total points, is an easy calculation). Talking with a financial planner is a good thing and finding out exactly what you can count on are all positive steps as you plan out your retirement. I do know that you don’t want a surprise in 2013, so start knockin’ on your attorney’s and DFAS’ door for more specifics. Good luck!

To be or not to be...a veteran?

Q: As a former member of the Army National Guard, I served 5 years and received a General Discharge under Honorable Conditions. I competed all over the country on our unit's rifle team winning many awards, and I enrolled in college for two years and received the G.I. Bill. I never was called up to active duty or war, but I completed Basic Training and A.I.T as well as monthly drills plus each summer I was not at basic or A.I.T. we drilled for a two week summer camp. My question is what requirements have to be met to be called a Veteran. Am I a Veteran or not? Or could you tell me how I can find out.

-Shawn, Nampa, Idaho

 A: First off, thank you for your service. And, by the way, I am a former competitive pistol shooter. That was sure fun! Using the dictionary as our guide, as a former member of the armed forces you are clearly a veteran. So now with that cleared up, I thought it might be useful to mention a few veteran benefits for which you may or may not be qualified. For example, a quick visit to the Department of Veterans Affairs’ website would indicate that you would not be eligible for burial in a VA National Cemetery, nor would you be eligible for a VA Home Loan. The loan program requires six years of Selected Reserves or National Guard service or 90 days or more (depending on when you served) of active duty. On the other hand, your education benefits are an example of a veteran’s benefit for which you are eligible. Regardless of what benefits you do or do not qualify for, you are a veteran!

Trying to understand Tricare

Q: My husband retired in December 2007. I had a baby in October ‘08.  My son was born 2 1/2 months premature which meant a long hospital stay.  Tricare said we are responsible for up 25% of all the hospital bills since my husband is retired.  My question: is there a transition period where a service member and their family members are still entitled to full coverage?  Did my health benefit change to Tricare Prime the day after my husband retired?  Thank you.

-Nadine, Dayton, Ohio (made up location :))

 

A:  As a financial planner I’m constantly asking folks what they plan to do in retirement.  It’s rare – okay it never happens – that someone says, “Have kids.”  Best wishes with that little bundle of joy! 

When your husband retired he should have been offered the option of enrolling in Tricare Prime, otherwise the default would be Tricare Standard (which, by the way, doesn’t have an annual enrollment fee).  Since you refer to that “25%” figure that would indicate to me you’re actually using Tricare Standard.  The good news is that regardless of which option you have, the maximum out-of-pocket costs are limited to $3,000.  So, that should help.  The Tricare website is chocked full of good information and contact phone numbers so that you can fully understand this valuable benefit!

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Military retirees can enjoy both their pension and Social Security

Q: Having just turned 65, I have put off drawing Social Security in order to raise my monthly amount. How does Social Security affect my retirement check?

-John, Covington, Tenn.

 

A: Making all the right decisions when it comes to retirement income can be a challenge to say the least.  Putting off taking Social Security to drive up the monthly benefit is generally a really good idea.  So, smart move!  Applying for Social Security, tapping various investment accounts, and minimizing taxes are all part of the art of creating an efficient, effective, and lasting income stream.  Now that you’ve turned-on Social Security you need to be aware that your benefits could be taxed.  If you file taxes jointly with your wife, and if half of your Social Security plus your other income (military retirement, retirement plan/IRA distributions, interest, dividends, etc.) exceeds $32,000, a portion of your Social Security will be included as income when you file your taxes.  If you do the calculation and exceed $44,000, 85% of your Social Security will be included as income.  That’s the bad news!  The good news is that receipt of your Social Security should not impact your military retirement.

 

SBA loans for veterans, spouse, too

Q:  I wanted to know if there were any veteran programs through the Small Business Administration (SBA) to start up a new business or invest in an existing one?

-Brian, Los Angeles, Calif.

A:  It’s exciting to have a great idea for a new business.  Now all you need is cash!  Yes, there are monies available, but it’s a big step so be sure to think through every detail before you leap!  In recent years the government has ramped up support of our service members and veterans.  A vastly expanded GI Bill, robust incentives for service and continued service, and programs like the Patriot Express loan program through the SBA are all examples. 

 

And the Patriot Express may be exactly what you’re looking for.  As is true with all SBA offerings, you’ll have to work through a participating lender, but it’s a huge opportunity with loan amounts up to $500,000.  Available to veterans, disabled vets, reservists, transitioning active duty, and even spouses of all of these groups, the loans carry low interest rates and can be used for most business purposes, including: start-up, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.  The SBA also offers small business training.  This looks as though it might be just what the doctor ordered!  Good luck.

 

VA Loan not available for ex-spouse

Q: I am a civilian and my husband is active duty, we are getting a divorce.  Am I entitled to his VA loan benefit for a home for our child and me?

-Rebecca, N.C.

A:  Sadly, I’ve written a lot about marriages breaking up in this column.  When it comes to divorce, my best advice is to find a competent attorney that is extremely familiar with the unique characteristics of military service and all that comes with (and because of) it.  This includes sort of abstract things like benefits, allowances, entitlements, retirement, etc.  So, while military retirement, active-duty income, and even the requirement for your husband to provide an allowance to house you and your child may be up for grabs and debatable, his VA loan entitlement is not.  Unfortunately, you can not use his VA loan benefit. 

Be sure to protect yourself, and your child, by finding a quality attorney.  To be fair, both parties should go on with their lives with emergency funds in tact, a plan for housing as well as education funding for the kiddo.  Another consideration that is often overlooked is ensuring sufficient life insurance is in place with the proper beneficiaries to continue child support payments should something happen to your ex while your child is still a minor.  The best of luck to you! 

 

Does military retirement affect your Social Security benefits?

Q: I understand (just recently) that when I get to the age of 65, that I will NOT be able to collect social security benefits AND my military benefits.  How so? Thanks!

-Ruben, Williamsburg, Va.

A:  I’ve got good news…it just isn’t “so.” I’ve received a number of questions like yours, Ruben, and I’m curious where folks are getting this misinformation?  Let me clear this up:  Social Security will not impact your military retirement.  Yes, it may impact how much you pay in taxes.  This is because military retirement combined with your income from other sources, will likely exceed the thresholds at which a portion of your Social Security is included in your taxable income ($25,000 if you’re single/$32,000 if you file jointly).  While that may be bad news, it’s certainly better than no Social Security at all.  I feel compelled to point out one really important thing to you.  The Social Security Administration does not consider 65 your full retirement age.  Take a look at the Social Security Retirement Planner, it's at least 66.  So you can go ahead and take the benefit at any time starting at age 62, but know that it will be a reduced amount.  Aside from that, relax and enjoy your retirement.  Thanks for your service!

Healthcare benefits true divorce consideration

Q:  My husband is full-time AGR in the Air National Guard.  He wants a divorce. He has 20 years as a traditional and 11 years AGR. We have been married 12 years.  I have MS. Is it possible for me to keep my benefits and medical, and what rights, if any, do I have to any retirement or income? Our whole future and planning was together.  I'm in trouble.

-Cheryl, Cheyenne, Wyo.

A:  You certainly have my best wishes during what I am sure are some very trying times.  The best thing you can do is to find good counsel…financial and legal.  Unfortunately, you will not be eligible for continued medical coverage under Tricare.  In order to be eligible for at least some level of continued coverage, you would need to have been married for 15 years.  Check out the Tricare handbook for more information. 

 

There is some good news…retirement benefits are another story.  Essentially, the court will decide how they are split.  Since your 12 years of marriage have coincided with military service I would focus on getting a good attorney who understands military benefits in order to come to an equitable settlement on that front.  

 

One other point: You’ll certainly want to investigate the cost of healthcare if a divorce is inevitable.  Given your situation, you may have to tap into your state’s high risk pool, in Wyoming, it is called the WHIP (Wyoming Health Insurance Pool).  Check with Wyoming’s insurance commissioner/department for more information.  Best of luck.

The preceding discussion is not tax, legal or estate planning advice. Consult your tax, legal or estate planning professional regarding your specific situation.
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