Educational Article
Tax Strategies
How Do I Lower My Taxes?
Paying taxes is a responsibility, and you should only pay what you owe, no more. The U.S. tax code provides various ways to legally reduce taxable income and lower the amount of tax you owe. Here are some general tax reduction strategies that are applicable to everyone and a few that are military specific.
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Contribute to pre-tax retirement accounts like a Traditional TSP or tax-deductible Traditional IRA
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Use Flexible Spending Accounts (FSA) or Health Savings Accounts (HSA), if you qualify
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Plan for capital gains taxes and consider holding investments longer than one year for lower tax rates
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Many allowances including the Basic Allowance for Housing (BAH) and Basic Allowance for Subsistence (BAS) are not taxable
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Combat-zone tax exclusion: Pay earned in a combat zone is tax-free
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State residency rules: Some Service members and military spouses can avoid state income taxes
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PCS moving expense deduction: Unreimbursed moving expenses due to Permanent Change of Station (PCS) may be deductible
Tip from Steve Georgoulakis, CFP®
As the saying goes, it’s not what you make, but what you keep that’s important. If you contribute to a retirement account, like the TSP, and your income is below a certain limit, you might qualify for the Saver’s Credit. This valuable credit can be worth up to $1,000 ($2,000 if married).
State Taxes for Military Families
Military members often live in one state but maintain legal residence in another. Thanks to the Servicemembers Civil Relief Act (SCRA) and the Military Spouses Residency Relief Act (MSRRA), Military spouses and Service members now have three choices when deciding which state to use for income tax purposes:
- The Service member’s residence or domicile
- The spouse’s residence or domicile
- Or the Service member’s permanent duty station
Since certain states do not collect income tax these new rules may help to lower or eliminate your state tax liability.
Tax Refunds: Good or Bad?
Getting a large tax refund might feel like a win, but it often means you paid more than necessary in taxes throughout the year. That extra money could have been in your paycheck all along. By adjusting your W-4 withholdings, you can better match what you owe and take home more each payday.
However, not all refunds are bad — if your refund comes from refundable tax credits (like the Earned Income Tax Credit or Child Tax Credit), it’s money you’re entitled to even if you didn’t overpay. In that case, your refund can be a powerful boost to your finances.