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:

• Military Tax Experts Alliance
• Military One Source's free tax prep software (miltax)
• Money Chimp's tax calculator
• IRS designated combat zones (CZTE zones)
• Money Chimp's Compound Annual Growth Rate calculator (CAGR)
• IRS Tax Brackets
• Podcast episode about state taxes #27
• Episode #130 with Pual Allen from Military Tax Experts Alliance
• Episode #119 with Kate Horrell on taxes for military spouses

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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 [email protected].

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