Income Tax Info on the MSRRA

Well, my previous post on the Military Spouse Residency Relief Act has generated a lot of comments.  I love it!  Obviously, there are many questions about what this Act is going to mean once it is fully interpreted and the individual states change their laws and practices.

Today, I'm going to talk about the income tax aspect of the Act.  This is the part that has interested me the most.  We've usually kept our cars in my husband's name (to make Virginia happy) and I've always kept my Florida driver's license and voter registration.  This was only a problem one time, when I wanted to take some college classes in Virginia, but it was a long time ago and those issues have been resolved by previous legislation.  However, paying taxes in multiple states is annoying and time consuming!  Any change that makes tax time easier is a good change in my book.

While this act was being written and passed, there was a lot of discussion about whether it meant that military spouses would be able to pay income taxes to their permanent residence state instead of the state in which they lived or worked.  Now that the dust has settled, it appears that is the case.  Based upon my reading of individual state replies and President Signs Military Spouses Residency Relief Act, published in the Journal of Accountancy, it seems that military spouses will be able to pay state income tax to the state that they claim as their residence.  If that state does not tax income, then the spouse will not be required to pay state income tax.  Whooohoooooo!!!!  What a blessing for military families.

So far, most information of the information available has come from individual emails that have been published at the Military Spouse Residency Relief Act's Facebook page.  I'm not going to cut and paste them all here - you can click on the link to see what people have heard from your individual state.  However, I will compile a list of links once the individual states begin to publish their new directions online.I know that we're all excited to learn more, but it will take time for it to be organized and implemented.  Hang tight and I'm sure it will all come clear in the coming weeks.

Military Spouse Residency Relief Act

Good news on the homefront!  The Military Spouse Residency Relief Act was passed by Congress last week and is awaiting the President's signature.

Here is the body of the press release:

Washington, DC –Tuesday, November 3, 2009. A comprehensive military family legislation, the Military Spouses Residency Relief Act (S 475 and HR 1182), which will legally recognize military spouses by providing them the option to claim the same state of domicile as their active duty spouse, passed through the House and Senate with strong bipartisan support, and is now being brought before the President to become a law.

The bill was introduced by Congressman John Carter (R-TX), who represents Fort Hood, the largest military installation in the country. “This is fantastic news for our service families worldwide,” says Carter, who has been pushing the legislation for the last three years.

Senators Richard Burr (R-NC) and Dianne Feinstein (D-CA) introduced the companion bill into the Senate, which passed unanimously in August. The legislation will amend the Servicemember’s Civil Relief Act (SCRA) of 1940 allowing military spouses to share a home state with their spouse, the service member.

Currently, military spouses experience impediments in voting and property ownership as well as deterrents in employment and education. The bill offers fair treatment of the military spouse and improves the quality of life for military families by allowing the stability of a single state of domicile to call home.

Over 8,000 military spouses, friends and family members united to support the Military Spouses Residency Relief Act on Facebook. http://www.facebook.com/pages/Military-Spouses-Residency-Relief-Act/51457362877 They shared their individual stories as they contacted Congressional representatives to ask for support. Initially, Army Spouse, Rebecca Poynter and Navy Spouse, Joanna Williamson, approached Congressman Carter with their request to petition. “It has been a grass roots effort by thousands of spouses across the country, who have campaigned to get this passed, by telling their stories,” explains Poynter.

“The support from Military Officers Association of America (MOAA) and the Veterans Service Organizations who testified in our support is greatly appreciated,” said Williamson, “and together we claim this victory for all military families.”

This is exciting news for military spouses and will undoubtedly save us all time and possibly even money.

More info on how the MSRRA impacts your income taxes.

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Calculating the Energy Efficiency Tax Credit

I've been planning on replacing some of our windows before the end of the tax year, because they are 45 years old and also because of the tax credit for energy efficiency.  This tax credit provides a 30% tax credit, up to $1500, for the replacement of windows, doors, insulation, roofs, HVAC systems, hot water heaters, and biomass heaters.  I did the math and figured that the tax credit maxes out $5000 worth of windows.  (I'm smart, huh?)

We replaced a few windows before and so I knew approximately how much it was going to cost.  I figured out which windows are most important (we have a ton of windows in this house) so that I would spend just over $5000.  The tax credit is good for the 2010 tax year, too, and by saving a chunk of the windows for next year, we'll maximize the tax benefit and we'll have time to save more money to pay for the improvements.

I called Rudy, my window guy, and asked him to come by so we could organize the project.  He mentioned the tax benefit and then said that I would need to spend around $7200 to maximize the tax benefit.  Huh?  That doesn't sound right.  It turns out, the credit is only available on the materials, not the shipping or the installation.I hoped for a minute that Rudy was wrong so I looked it up.  He was right (after all, he is the window guy.)  The credit is good on the price of the windows only.  And around $5000 worth of product ends up with a total bill of about $7200 if you are having them installed by someone else.  When Rudy did the actual calculations, he provided me with the portion of the bill that was tax deductible along with some information that will be required to prove that they are eligible windows.

(And yes, I know that I could install them myself and save a bundle.  Honestly, though, there are days I can't even get a shower.  I want these windows in before the cold comes.  This year.)

If you've been thinking of making improvements, be sure that you understand how the tax credit is calculated.  For more information, you can look at the Energy Star website.  There are other credits available for other types of energy efficient improvements and more details can be found at the same website.

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To Buy, Or Not To Buy

Recent headlines about Cash for Clunkers and the upcoming Cash for Refrigerators programs have me rethinking some of my spending plans.  Here is the situation:  my deployed husband is coming home in 2010 and we anticipate moving sometime thereafter.  Possibly outside the country.  As a result, I've got some household items that could use replacement but I'm waiting to see where we're headed:  a new car, a new refrigerator, a new vacuum, a new clothes dryer.  I've been nursing these things along because it makes no sense to buy something new just to put it in storage or try and resell it (at a loss) a few months later.  I restrained myself from using the Cash for Clunkers program to replace a car, because a car is such a large purchase, I wasn't necessarily interested in buying a brand-new car anyway, and I still need a large car and I wasn't really happy with the models that would qualify.  However, this Cash for Refrigerators program is really tempting me.

Basically, this is a federal program that uses some of the economic stimulus money to encourage purchases of Energy Star appliances.  Buyers will not need to "trade in" their old appliances to be eligible for the rebates, and the federal program can be added to state programs already in existance.  (Find a list of current state programs here.)  Individual states can decide which items will be eligible for rebates in their state.

This brings me to a dilemma...shall I go ahead and purchase new products during the rebate period?  If we stay in the states, I will be needing them.  Some of the items, such as heating and air conditioning systems, will help my house sell or make it easier to be a landlord.

It looks as if the program will become available in November and it is expected that the money will run out pretty quickly.  If you think that you might want to participate, you should start planning and contacting contractors now so that you don't miss the winodw of opportunity.  I'm at least going to talk with my husband and call around to see what might benefit my family.  I'm curious to see if you decide to make any purchases based on the incentive program.

5 Smart Ways to Use Your Tax Refund

If you overpaid taxes last year, you're getting a refund sometime this spring. That chunk of cash can quickly disappear out of your bank account if you don't have a plan for using it wisely. So, what should you do with your tax refund? Here are the five smartest moves, in order:

photo by: AComment

1. Build an emergency fund. What is an emergency fund? It is a small (or large) chunk of cash that you can get to within a few days. Savings accounts, CDs and money market accounts are all good places to keep your emergency funds. Why do you need an emergency fund? Because you never know what life is going to throw at you. Emergency funds can make things like car repairs, tickets home to see a sick relative, or exploding hot water heaters seem like small problems instead of huge catastrophes. How much of an emergency fund do you need? Well, that depends on you and your life. A single soldier living the barracks is going to need a lot less than a married airman with four kids and a 40 year old house. Try to imagine the worst possible month, financially, then make that your goal for an emergency fund. For me, that would involve a leak in my house, repairs to a car, a dead computer, and dental work that wasn't completely covered by insurance. That's a lot of money. For other people, it might be as simple as money for car repairs or plane tickets. How can I ever save that much money? Start small. Your tax refund can be a great beginning to a healthy emergency fund. Consider setting up an automatic transfer from your checking account to a savings account each month. I find it works better if it is a savings account that I can't easily access, but that is my own personal preference. 

2. Pay down debt. High interest debt, like credit cards or personal loans, should be paid off first. After that, things like car loans and possibly student loans.  There are so many benefits to this:  you'll lower the amount of interest you're paying each month, you'll pay off those debts faster, and you might even free up some money in your current budget.  A triple win!
3. Contribute to your retirement account. There are two ways for military members to do this: either change the amount that you are contributing to your TSP account (using the money from your tax return to make up the difference in your paycheck) or open an IRA. IRAs aren't scary or hard...just head over to your credit union or call USAA.
4. Save for future spending. Hoping to buy a really cool car, or put a down payment on a house? Put your money into a safe but interest bearing account. Interest rates are pretty low right now, but for longer-term money, you can get decent rates on some CDs.
5. Have a little fun. You may want to take a certain portion of your tax refund for fun. Depending on the amount of your refund, 10% (or 20%) could mean a new Xbox or a new video game. It could mean a trip to the amusement park or a trip to the bowling alley. Designating a certain portion of your return for fun will help make all the other smart choices that much more enjoyable.

With some preplanning, your tax refund can be providing benefits for years into the future.  Take a few minutes before your tax refund arrives to plan the smartest choices for your life.