21 July 2015

I enlisted in the Navy from my home state of Ohio back in 1987, making Ohio my official home of record for military pay purposes. At that time Ohio would tax my Navy income even though I wasn't living in Ohio. I didn't care for that, so when I was stationed in Florida I marched my behind down to the Duval County courthouse and became a legal permanent resident of Florida - one of the handful of states that do not have a state income tax.

Many service personnel do what I did and change their home of record to a state without an income tax. However, there's a secondary effect that goes along with changing your home of record that many military members fail to take advantage of on their federal income taxes. Probably because it is a little complex...

Taxpayers can take a deduction on Schedule A for state (and local) income taxes OR sales taxes. If you are a resident of a state that doesn't have an income tax, then you should be taking the deduction for the sales tax. You take the sales tax deduction based on the area where you live, not your state of legal residence or home of record. Military members stationed in Virginia can deduct the Virginia sales tax from their federal taxes, even if their home of record is Texas or Florida.

There are two ways to figure the Virginia sales tax deduction. The first is to actually track the sales tax you pay all year. That level of record keeping sounds quite horrible to me, but I do know one person who does it that way and he gets a somewhat larger deduction as a result. The second way is to estimate your sales tax deduction based on your income. The IRS has a handy online calculator to assist with this. 

This next part is important, so read it twice:

While some of your compensation (like BAH) is not exposed to income taxes, the IRS recognizes that you are paying sales taxes when you spend that money. Therefore, you can add your untaxed income into the calculation for the sales tax deduction. It gets you a larger deduction.

The higher your income, the more sales tax you are presumed to have paid and the higher the deduction you'll be able to claim. You'll want that deduction to be as large as possible, so be sure to include all of your BAH and BAS for the tax year, as well as any pay you received in a tax-free zone. I find it helpful to have an LES from the tax year when preparing a tax return for a military member.

The sales tax rate in Virginia Beach is 6%. That includes the 4.3% statewide rate plus the additional 1.7% rate we pay in Hampton Roads. Some software has you enter those numbers separately and some has you enter just the 6% number.

It's a valuable deduction. Last year a Warrant Officer asked me to look over his taxes after he had done them himself. He is a Florida resident living in Virginia and itemized his deductions on schedule A. The blank spot for the deduction for state income or sales tax jumped off the page at me. Adding that deduction increased his refund by a little over $200. If you're eligible for it, but not claiming it, you are paying more in federal taxes than you are required to pay.

 

Disclaimer

Information in the Tax Blog is current as of the day it was posted. Tax laws change frequently, and it is likely that as time passes acts of Government will make some of the older blog content out of date.

The information provided is for education purposes only. It is general in nature and may not pertain to the Reader's situation. Every taxpayer's circumstances are unique. Reader's are urged to do some research or talk to a tax professional before acting on any of the information posted in this blog.

Paul D. Allen is a proud member of the National Association of Enrolled Agents, the National Association of Tax Professionals the Financial Planning Association of Hampton Roads, the National Association of Personal Financial Advisors (NAPFA), and The Tidewater Real Estate Investors Group. You can read more about Paul's background here.

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Common Acronyms

ACTC - Additional Child Tax Credit

AGI - Adjusted Gross Income

AMT - Alternative Minimum Tax

APTC - Advanced Premium Tax Credit

AOC - American Opportunity Credit

CTC- Child Tax Credit

EIC - Earned Income Credit

HoH - Head of Household

LLC - Lifetime Learning Credit

MFJ - Married Filing Jointly

MFS - Married Filing Separately

MAGI - Modified Adjusted Gross Income

PIM - Plan of Intended Movement

PTC - Premium Tax Credit

QC - Qualifying Child

QHEE - Qualifying Higher Education Expenses

QR - Qualifying Relative

QW - Qualifying Widow(er)

 

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