Posted by James Financial Services Inc

Confused By The Military Tax Instructions for 2020? Here is What to do

Confused By The Military Tax Instructions for 2020? Here is What to do

A payroll tax deferral was put in place by President Donald Trump at the end of 2020. The income tax instructions recently released by the Defense Finance and Accounting Service (DFAS) and the IRS are causing a bit of confusion for military members and their families who are working on filing their tax returns.

The payroll tax deferral was designed to help those in financial difficulty due to the COVID-19 crisis. This means that for most servicemen earning less than $137,700, Social Security taxes were not deducted from their pay from September to December 2020.

This money is now being refunded by withholding it from troop salaries throughout 2021. However, this refund is not reflected in the 2020 W-2 Troop Salary and Tax Return issued by DFAS, used by individuals to file tax returns.

Instead, DFAS says on its website that service members will receive a modified W-2 for 2020, sometime in 2022.

"According to IRS instructions, if you only had one employer in 2020 and your 2020 W-2c (Corrected Wage and Tax Return) form shows only one correction in box 4 to account for the social security tax for employees which has been postponed to 2020 and retained in 2021 according to IRS notice 2020-65, no additional step is required," the DFAS website states.

This instruction has troubled many soldiers and their families. Should the military delay filing income tax? Or do they have to file an amended return for 2020 after the right form arrives in 2022? The answer to both questions is no.

With a few exceptions, troops should not delay filing tax returns for 2020. The normal 2020 tax filing deadline was on April 15, 2021. The deadline for the actual filing may be later if the service member resides abroad, deployed, or files for an extension. But, before the deadline, service members must file their taxes on time. When it comes to the amended tax return and DFAS tax return, most people won't have to change their 2020 tax return when they receive the W-2 2020 correction in 2022.

This is because Social Security taxes are not included in a typical simple tax return. Federal and state income tax is not affected by withholding, deferral, or social security tax refund. Therefore, the correct W-2 would only come into play in very special and rare circumstances. Suppose each person in your return had only one employer in 2020, and the only difference between the original W-2 and the corrected W-2 is the social security withholding tax shown in Block 4. In that situation, it is not necessary to file for an amended return.

If you or your family member on your joint return had more than one employer and you or a family member earned more than $137,700 in 2020, you should consult a tax professional to find out if you need to file an amended return for 2020. But while it is not necessary to refile, service members should keep the amended W-2 when it arrives. The amended W-2 will serve as proof that they have refunded any taxes not withheld in 2020. It should also be kept with other tax documents for 2020. For most people, this deferral and payment of withholding tax on social security will not affect the filing of your tax return for 2020. For those who might be interested, this will not happen until 2022. Keep an eye out for the corrected W-2 when it comes out next year.


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