Tax Intro: What Military Families Need to Know About US Tax Code to Max Your Paycheck #152

Dec 2, 2024

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Tax advantages, confusing tax brackets, marginal vs effective tax rates, and more!

Spencer and Jamie discuss how military service members benefit from unique tax advantages, including untaxed allowances and combat zone tax exclusions.

They also break down real examples of effective tax rates for different ranks and locations, explain tax brackets, and discuss investment implications, particularly for Roth vs traditional retirement accounts.

Main Topics & Questions Covered:

How did Jamie pay an effective tax rate of only 10% in 2023?

What military pay components are not taxed?

BAH (Basic Allowance for Housing)
BAS (Basic Allowance for Sustenance)
OHA (Overseas Housing Allowance)
Overseas COLA
Combat Zone Tax Exclusion Pay (CZTE)
Hostile fire/imminent danger pay

How do combat zone tax exclusions work?

Areas designated by presidential executive order
No limit for enlisted members
Officers capped at highest enlisted monthly pay

Real examples of effective tax rates for:

E5 at Holloman AFB (single)
E7 at Fort Sill (married with children)
O3 at Wheeler Army Airfield (married with child)
O5 in Hawaii (with children)

How do tax brackets actually work?

Progressive system explanation
Standard deduction impacts
Marriage tax advantages
Common misconceptions about brackets

Investment implications:

Roth vs Traditional retirement accounts
Why Roth often makes sense for military members
Tax considerations when transitioning to civilian life

Key takeaways:

Military members often have very low effective tax rates
Understanding true taxable income vs. total compensation
Importance of tracking tax information on LES
Resources for military tax assistance (Military Tax Experts Alliance)

The hosts emphasized two main recommendations:

Consider Roth retirement contributions while serving
Be cautious about buying houses while on active duty

Links:

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If you have a question you would like us to answer on the podcast, please reach out on instagram.com/militarymoneymanual or email podcast@militarymoneymanual.com.

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