by Lila Quintiliani, AFC®, Military Saves Program Manager
Check and see if you need to take action before you file or whether you may need to file an amended return for a previous year.
Service members and families should not overlook the Earned Income Tax Credit (EITC), a refundable federal income tax credit for low- and moderate-income working individuals, couples, and families. Nationwide during 2018, 25 million eligible workers and families received about $63 billion from the EITC. The average amount received nationwide was about $2,488. But the IRS estimates that about 21 percent of taxpayers who are eligible for the EITC fail to claim it, or are simply unaware that they qualify.
You can't get the EITC unless you file a federal tax return and claim it. Visit irs.gov to determine your eligibility and get additional information.
If this is the first year that you are claiming the credit, use the IRS EITC Assistant to see if you qualify for tax years 2018, 2017, and 2016. You can file any time during the year to claim an EITC refund for up to three previous tax years.
The IRS will not issue refunds for returns that claim the EITC or Additional Child Tax Credit before February 27, 2019. Early filers can make the most of this delay by planning how they will save their refund.
Withhold too much from your paycheck, and you’ve given Uncle Sam an interest free loan; withhold too little, and you risk fines and penalties.
With the implementation of the new tax laws, last year the IRS suggested employees revisit their W4 form which specifies the amount of tax that is withheld from each paycheck. If you’ve had any life changes, such as marriage, divorce, or the birth of a child, it’s also a good idea to check and see whether the correct amount is being withheld. You can use the IRS’ calculator to see where you stand. Changes to the withholding amount can be done through MyPay.
Free tax help is available for military members. Many installations and local communities have free tax preparation sites. Military OneSource has free tax preparation and e-filing software as well as a toll-free hotline staffed by military tax consultants. Avoid refund anticipation products offered by commercial tax preparers – although they get you your tax refund quickly, they come with very high fees!
While it’s tempting to treat a refund as “free money,” in reality, many times a refund means that you simply overpaid in withholding and your own money is just being returned to you. If you get a huge refund, you should look at adjusting your withholding tax (see step 3), but you should also have a plan for how you are going to spend your refund. One option is the 30-40-30 plan, with 30 percent of your refund going toward debt. Use 40 percent of your refund toward current needs (and this might include some discretionary spending). Then use the final 30 percent toward savings, whether that’s to build up your emergency fund or for longer-term savings.
Take the Military Saves Pledge today and build wealth, not debt.