IRS Tax Refund Military: What To Do Next Year & Now | Military Money Manual Podcast Episode 74

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Jamie and Spencer Reese from militarymoneymanual.com discuss what to do if you received a tax refund from the IRS this year.

Military Money Manual Podcast Episode #74 Links

Outline of Episode:

  • Filing taxes with Miltax & when to consult a professional
  • What to do with a large refund? 
  • Adjusting withholding for a larger monthly paycheck
  • When and how to make a plan for your refund
  • Ideas for how to allocate tax refund money

Military Money Manual Podcast Episode #74 Transcript

[00:00:00] Spencer: If you don't take that pause like Jamie mentioned, when you file that tax return and it says, Hey, congratulations, you're getting $2,400. That's the time to think, “Okay, how do I want to allocate this money? Where does this money need to go? That's going to align most with my values?”

[00:00:37] Jamie: Welcome back to the Military Money Manual Podcast. I'm Jamie, co-host of the Military Money Manual podcast with my good friend Spencer.

Hey, Spencer. Today we're going to talk about what to do with your tax refund. By the time you hear this episode, you've already filed your taxes more than likely, and maybe you have some money coming back. And so we wanted to share some thoughts and advice on what you should do with that money to make sure it goes to good use.

Spencer, the big question is what do we do? Should we just go blow it all?

[00:01:05] Spencer: Yeah, screw it.

[00:01:08] Jamie: Die with zero. Let's do it. 

[00:01:09] Spencer: Die with zero. Yeah. Jamie, it's a question that a lot of people face every year. This year, the New York Times estimated based on IRS data that the average federal tax refund will be about $2,900.

So we can just wrap that up and call it $3,000. That's in 2023 and last year it was even higher. It was $3,200, but that was due primarily to a lot of generous tax breaks that were handed out during the Covid 19 pandemic. But the big thing to remember with a tax refund is that this is your money, and the government has been so gracious as to hang onto it for the majority of the year.

And in fact, if you're filing your taxes towards the end of the deadline, which this year in 2023 is April 18th, it's usually around April 15th every year if you're filing your taxes close to the end of the deadline means that the government has held onto this money since January of the previous year, all the way through December, and they're not going to give it back to you until they process your tax refund.

Probably not until, let's see, April, May, June, maybe May, June, a couple weeks, depending on if you file electronically, which you definitely should. Don't file on paper anymore. We don't use fax machines and we don't use paper filing anymore, so please use electronic filing.

[00:02:29] Jamie: Do you remember when you filed, like your first job in high school or whatever?

You would have the form and you'd have to punch in the numbers over the phone. That was the first way I did it. And be like, enter your amount for block one, and you'd type in the digits and be like, then press pound when you're done or something. So I remember like with our cordless phone sitting there at the kitchen table with my dad filing taxes over the phone and typing it in one block at a time.

[00:02:53] Spencer: Actually, I've never heard of anyone filing taxes over the phone. Are you sure you weren't scammed?

[00:02:58] Jamie: I don't think so. I don't know. Maybe.

[00:03:00] Spencer: That's crazy. No, actually I've never heard of that. I think when I was in high school I might have done it on paper, and then when I got to college we had TurboTax, so I just started doing it through TurboTax.

And then when I got into the military and little offshoot, we'll just talk about taxes here just for a second. But if you go through MilitaryOneSource.mil or you just Google “Milax”, the DOD in partnership with H&R Block puts out a software suite. It's available online, it's completely through a webpage, and you can file all your taxes online.

This is my number one recommended way for people in the military to file their taxes. If you are only receiving a W2, that's a report of your taxable income from the US military. If you're a single guy or gal and you're receiving a W2 from the military, your taxes are simple. Let me reiterate that. Your taxes are simple.

You have box 1. That's how much income you made. You have a couple of other boxes that report how much social security tax you paid, how much Medicare tax you paid, and how much federal income tax was withheld from your paycheck. It's what, Jamie, maybe seven or eight numbers that you need to type in. In fact, with modern software, you can upload your W2 and it reads all the numbers for you.

[00:04:20] Jamie: I would even go a step further, Spencer, and argue that if you are married, And your spouse works. You each have a W2 and even if you own a home and you have some investment income in a brokerage account or something, that's still a very simple tax return for me. Where I start to draw the line on, you might want help if you have a big inheritance or you own a rental property or multiple rental properties in a different state or some kind of more confusing thing like that.

But for most military members, the military OneSource Tax program that allows you to file for free through H&R Block and reach out to experts on Military One Source for help is the way to go. For sure. Definitely agree with that.

[00:05:02] Spencer: Yeah, so usually you don't need to pay for advice if you feel like you do pay for it.

But one thing to know is that maybe you don't need to pay for the advice every year if your tax situation doesn't change from year to year. And let's say you paid someone to help you do your taxes the year before. Typically, if they're not a certified public accountant, CPA, all they're doing is they're looking at the form and they're typing it into an online service.

Service. They're not actually providing you with any advice or assistance. They're just saying, this number goes into this box. And for a lot of military service members, as we said, you only have a few numbers that need to go into a few boxes. Even if you have a TSP account, even if you have a taxable brokerage account, like Jamie mentioned, if you have Roth accounts, Roth IRA accounts, those are all pretty simple when it comes to filing your taxes, and the software is pretty good about asking the right questions and making sure that you get the credits that you qualify for. 

So since the tax codes changed a few years ago, they increased the standard deduction, which makes it a lot easier for people now to just take the standard deduction and not worry about itemizing your expenses or your deductions.

And for the vast majority of military service members, unless you have a side business unless your spouse is self-employed or has their own business unless you have a lot of rental properties Unless you fall into one of those circumstances, you're probably going to be better off just taking the standard deduction.

And again, play with the numbers in the tax software. That's another beauty about doing your own taxes you can see, okay, what would be the impact if we had another kid? And maybe that shouldn't be the number one driving decision, whether you have another kid, but you can put it in there and say, oh, we get another $3,000 tax credit.

Or if you put in there, Hey, what if I was married and filing jointly instead of filing separately, then you could see, oh, I would save this amount of money on taxes. So there are a lot of benefits to filing your own taxes, and I agree with you, Jamie. I did not hire a CPA until I was running my own side business.

I filed my own taxes for decades, and it worked out just. And there are phone numbers that you can call through that mill tax. I think one of the biggest confusions I see online, especially on Reddit, is people who had state income tax withheld, but they're in a state that doesn't tax military paychecks.

So for instance, if you're a Pennsylvania resident, and double-check my figures on this because I'm, I might have the details wrong, but if you're a Pennsylvania resident and you're stationed outside the state of Pennsylvania and you're active duty military, you don't pay Pennsylvania State income tax. However, the DFAS might withhold the money.

So then what you need to do is file a return with Pennsylvania State, and you can do that through the Milax software. And you can say, Hey, I was an exempt military service member, and they will refund you all the money. The trick here is if you had a large state income tax dollar amount withheld throughout the year, you need to go work with your finance office or your S-1 or whoever the equivalent is for your branch.

And you need to figure out how to get that state income tax to stop being withheld if you're just going to get it back every year because that's money that could be going into your pocket that you could be spending on your lifestyle and your expenses. And you don't need to be loaning it to the state government of Pennsylvania for 15 months.

[00:08:35] Jamie: Spencer, you mentioned earlier that when we get a large refund back, it's like giving the IRS an interest-free loan of our own money. We're getting our own money back. And then you gave the example of money from January not getting it back until January of 2023. You might not get back til May of 2024, so 14, or 15 months down the road.

So if you're getting a $3,600 refund, for example, that's $300 a month. If my math is correct, I am a history major, but I'm pretty sure that one's right. $300 a month and that's $300 in January. You're missing. $300 in February and every month you're missing out on that money and the potential impact of it going towards your goals or the compound interest of you investing it, and then you don't get it back for 14, 15 months.

Worst case scenario there. So a lot of times I think when you say, don't give the IRS an interest-free loan. People look at you like you're some right-wing conspiracy nut job that hates the IRS and wants to abolish all government. But it just is simple math that you don't want your money sitting in the IRS.

Which is not really in a vault, sitting with the IRS when it could go to work towards your goals. So if people are getting a large refund, what kind of things should they be looking at to start making use of that refund? And then maybe we can talk later about how to not get such a large refund.

[00:09:54] Spencer: So there are two approaches that you could take, Jamie, if you're getting a large refund. The first one I'll talk about is assessing your financial situation and see if there's a way that you can have your withholdings decreased on your biweekly, your first and 15th of the month paycheck, such that you're going to get more money in your paycheck, and then have a smaller tax refund at the end of the year.

And that way, like we were talking about, you are not giving that interest-free loan to the government. You are putting that money into your pocket and you're still paying your taxes. It's just at the end of the year when you go to file your tax return, your tax refund will be a little bit smaller because your first and 15th paychecks were a little bit bigger. 

Like every financial problem, it's important to understand where you are, and where you want to go, and then figure out the route that you're going to take to get there. So if you are fortunate to receive a $1000, $2000, or $3,000 tax refund this year, Take the opportunity before you're like, Woohoo.

And just spend it on whatever you want to. Pause maybe for a day, maybe for a week, maybe for a month, and think about what can I spend this paycheck on that's going to align with my values. And that might be different for everybody depending on their financial situation, right? So you might be in a negative net worth situation where you are trying to pay off debt and you've just been handed this great tool, this great weapon to defeat the evil debt that you have hanging over your head.

Or you might be in a situation where you have a positive net worth and you're working on building your emergency fund. And this might be, you might be able to take a couple of thousand dollars of this tax refund, top off that emergency fund, and now you can move on to saving and investing for financial independence.

Or you might be in a situation where you saved 40% of your paycheck last year, you have no debt, your emergency fund is completely topped off, and you're already ahead of your savings goals this year. And guess what? For whatever reason, there was a tax credit that you qualified for and you get a large tax refund, maybe this is your opportunity to say, “Honey, we're taking the kids and we're going to Disney World.”

So, Jamie, that's the kind of the first approach that you can take is you can reduce your withholding so that you get a larger monthly paycheck or first and 15th of the month paycheck, and then you can reallocate, those additional funds coming in every two weeks towards your financial goals.

The other approach to take is maybe you don't adjust your withholding, and this is actually kinda the approach that I took towards the end of my career where there was so much flux and there was so much flexibility in how much money my wife made, how much money I made if I got a tax-free month because I hit a combat zone while I was flying the C-17.

And so what I ended up doing is I just said, look it's too difficult to kind of cut a gnat’s ass and figure out exactly how much withholding I need to have on every paycheck. I'm just going to set it, forget it, and at the end of the year, if I go and file my taxes and I owe the IRS a little bit of money, okay, then I'll, I have savings and I'll make that payment.

But what usually ended up happening, especially in the military, is I still got a refund. And when that refund was in the thousands, $2000, $3,000, I really enjoyed getting that lump sum and being able to allocate thousands of dollars towards a goal rather than $20 bucks a paycheck or $10 a paycheck. It didn't seem to me at least that it was moving the needle.

That had a much greater psychological impact on me.

[00:13:34] Jamie: That's a really good point. I'd never really thought of it that way because I like to have extra money each month, but I definitely understand that, and that would be a good situation for someone who's not struggling, maybe to make ends meet each month.

And if you are struggling, there was a time in my life when an extra $25 or $50 a month would've been game-changing It felt like. So if you're not in that boat where you're behind or you're living paycheck to paycheck, then strategy number two that Spencer just mentioned might be a little more applicable for you.

[00:14:04] Spencer: I think it really just comes down to Jamie, like, where are you in your life? Like at what point? If you're a young enlisted guy or gal, you just joined the service, you're living in the dorms, you're not making a lot per month and going in and adjusting your withholding or changing your state to a tax-free income state.

We talked about in episode 27, we talked about how to stop paying state income taxes. And it's crazy to me, Jamie, but when I was a flight commander and I would have young airmen, I, one of the first things that I would have them do that is I would say, “Hey, if you're comfortable, print a copy of your myPay statement and bring it to me so that we can go over it together.”

And some people would have state income taxes. And it would be a couple of hundred bucks a month. And you're not making enough money as a young airman, an E-3 an E-4, even to be paying that, especially when you've been stationed, you've been domiciled in a state that doesn't have a state income tax.

So if you're going through Texas and you intend to make Texas your permanent state of residence and you have a connection to the state of Texas. Go to the finance office and set Texas, which has no state income tax as your place of residence. And so that, to me, that's just crazy that, and some people have this weird nostalgia for their home states are like, oh no I love Kansas.

I would never leave Kansas. I'm not saying you have to leave Kansas, Dorothy, but listen to Toto here. And he's saying, set your state of residents, at least for the. To a state like Florida, Alaska, or where else, Washington, I think.

[00:15:39] Jamie: Yeah, there's a whole list of them we gave and North Dakota just changed theirs.

[00:15:42] Spencer: North Dakota just changed, so make sure that that's fine. You can have that love for your home state, but that doesn't mean you have to keep paying taxes in it. So just check with your finance office and make sure if you have the opportunity to change your state of legal residence to a state that has no state income tax, take advantage of that at least while you're on active duty.

[00:16:04] Jamie: Spencer, I want to go back to a couple of minutes ago when you mentioned when you get that refund to pause and come up with a plan for a day or two, I would even argue that the time to do that and develop your plan might be better done before the refund even comes if you file online through the IRS and file for direct deposit for your refund, which I hope you do, you should have about three weeks notice with the exact amount you're going to get before the deposit comes. 

That's the time in my mind to sit down and think about what your priorities are and where you need to put this money to put it to work in alignment with your goals and your priorities.

So sometimes when you see a large deposit, you can get emotional about it, and then you're not always making the best decision. So consider making that decision now if you haven't yet before the deposit comes, so the money is put to the best use.

[00:16:53] Spencer: So Jamie, in a recent episode, a couple of weeks ago, episode 73, we talked about how to save your first thousand dollars while you serve in the military.

Here's your opportunity right here. If you're getting a tax refund and it's a couple hundred or a couple thousand dollars, Take a little bit of that and put it into your savings account, and you'll be either well on your way to saving your first thousand or maybe even well on your way to saving your first $10,000.

So a tax refund is an excellent opportunity to get closer to your financial goals, and it doesn't matter where on the spectrum you are. If you're just getting started, with the Dave Ramsey baby steps. If you're just getting started with paying off debt or billing an emergency fund, a thousand dollars goes a long way towards achieving those goals, especially if you are a young enlisted service member and you're setting aside a hundred dollars per paycheck.

This is like fast-forwarding six months because you're getting this money returned to you and you're able to allocate it exactly how you want. 

I will caution you. That it can be really exciting when you see, oh my gosh, I'm getting a $2,400 tax refund. But that money can go very quickly, and if you aren't intentional about it, if you don't take that pause, like Jamie mentioned, when you file that tax return and it says, “Hey, congratulations, you're getting a $2,400 refund.”

That's the time to think, okay, how do I want to allocate this money? Where does this money need to go? That's going to most align with my values. If you listen to Jamie and me for a while, you know absolutely that we're not advocating that you set all this money aside for savings. There is absolutely a time and a place here to splurge a little bit, to have a little bit of fun, to maybe take 10% of it and take the wife and the kids, or maybe just the wife out for dinner, or maybe set half of it aside into a vacation fund and half of it into an emergency.

Or maybe say, look, we're on track this year to max out our Roth IRA. Why don't we open up another Roth IRA for the spouse that doesn't have a Roth IRA, and we can get halfway towards maxing that one out?

[00:18:56] Jamie: Some other ideas you can do with the money are investing in yourself or prepaying expenses for the next year or six months.

So when I say investing in yourself, I'm thinking of online courses or some certification that maybe you or your spouse might want. And what I would encourage you to target is a certification or course that's going to enable you to make more money or be better at your job, especially if it's something outside of the military.

I was thinking the other day how easy it is for me to spend $8 or $25 to eat out. But if I see an online course that's going to make me a better public speaker, and it's $19.99, I'm like, oh, they're trying to rip me off. And those are the things that you could do to invest in yourself versus eating, Chipotle or Burger King at the BX multiple times a week or whatever.

Invest in yourself with the money. Buy a course, buy some kind of training, or something that's going to enable you to make more money. Launch that side hustle. Buy a domain you've always wanted to try. Having your own website or some kind of online store. Those kinds of things are a great use for the tax refund if you're getting one as well.

And then when I talk about prepaying expenses, let's say that you're used to setting aside $100 a month for Christmas this year. If you get a $600 refund, then just prepay that Christmas expense or something like that, so then you have more money back each month. Or if you had to cut something out of your budget, like Spotify, my family pays $18 a month for Spotify.

For some military families, that's going to be too steep and you choose to cut it out of your budget because it's not in alignment with your current priorities and goals. Maybe you set aside 18 x 12 and whatever amount that is you set aside for the month and your Spotify's covered for the next 12 months.

So there are some things to do like that lawn service. If you don't like mowing your lawn, you can use your refund to prepay those expenses and then make your life easier or increase the value that you give to your side hustle.

[00:20:55] Spencer: I love the idea of prepaying expenses, Jamie, because I know for me, there's a lot of times where even though I've automated so much of my finances, it still seems like Christmas sneaks up on me every year.

What do you mean it's already November and I have to start going to buy presents for family and friends? But if you get that large lump sum and you take that second to pause and you think, okay, what financial goals do I have for the rest of the year? And maybe that's setting aside money for my wife's birthday, even though it's in February of the following year.

Or maybe it's setting aside money for Christmas presents like I was talking about. But once you've met that expense, that you've met that obligation, you've set that money aside. Now you can say, okay, what's next on the list of things that I want to be saving and investing for? And maybe it's just a general financial independence goal.

And you can take that lump sum and you can set that aside for a lifestyle expense. And then you can crank up your TSP contribution by just 1% or 2%, and you're not even going to really notice that money being gone from your pay. But you are going to notice it in five years, 10 years, 20 years when all of a sudden your TSP contributions are being maxed out and now you've set yourself on this glide path.

So when you can access those funds when you're 59 and a half, you know there's going to be no problem that you're going to have several hundred thousand or maybe even over a million dollars in that TSP account.

[00:22:23] Jamie: So I thought of two more ideas I want to share, Spencer, and then I think I'm done on the tax refund issue, but one idea I have is one of the favorite date nights I've ever had with my spouse was a cooking class.

So there are some things like that, activities that will pay dividends if you get, not only do you get a fun date night out of it, but you also learn how to cook a new dish so you get the quality time and you get a new skill. So if you can do that together and then you're better at cooking, which means you're spending less money on eating out and things like that.

So it's just a, you're just going to keep reaping the rewards from one decision like that to pay for an activity. And maybe that's something you could never see yourself doing, is paying a hundred or $200 for a cooking class date night with you and your spouse. So here's an opportunity to do something like that and then you'll be paying, you'll be reaping the dividends of that for months afterward. 

And then lastly, another idea is to resolve conflict with this extra money. So who here, raise your hand, because I'm used to being a teacher right now. Raise your hand if you and your spouse fight over the thermostat.

So let's say that, Your spouse wants it warmer in the winter and it's like a two-degree difference. What's the cost difference of the two degrees? Maybe it's $50 or $75 a month. So okay, give me $75 times four to cover the winter months, and then I can put the house at the temperature that I want, and you don't have to worry about the cost of the thermostat anymore.

So whatever the fight is, whether it's the water bill, the air conditioning, or the maid in the house, you can help resolve some conflict and make your life easier with this extra money as well.

[00:23:49] Spencer: I love that idea, Jamie, of using money as a tool, right? That's what it's there for, and there are a couple of uses for this tool, right?

You can set it aside and have it make you more money through compounding interest and investments, but you can also. Reduce conflict. You can make your lifestyle better. You can increase both your and your family, your spouse, and your kids' happiness. And if you are just a miser, right? This Uncle Scrooge McDuck that sits on this pile of gold, doesn't do any good.

[00:24:18] Jamie: Why are you looking at me right now? Stop looking at me.

[00:24:22] Spencer: Do you feel attacked? 

[00:24:24] Jamie: No, no I don’t. 

[00:24:26] Spencer: Oh good. And I think those are both great thoughts, Jamie. One other thought I had too is you mentioned the $18 a month Spotify charge, and I was wondering how much money would you have to set aside based on the 4% rule to pay for Spotify for the rest of your life. So $18 a month times 12 is $216 a year. And then taking the 4% rule, multiply times 25, and we got $5,400. So if you can set aside $5,400 and you put it into an 80/20 mix of stocks and bonds, now nobody's going to do this, right?

Nobody's going to create a Spotify fund. But it's just an interesting way to think about that. Once you have $5,400, whether it's invested into the TSP and a lifecycle fund or like a CSI split, or if you've got it into a Vanguard Total Stock Market index fund, once you've got about $5,400 in there, 4% of that is $18 a month.

And you've covered your Spotify charges for the rest of your life. You know there's going to be some inflation and the price will probably just go up. But in theory, you've now covered that expense for the rest of your life. And I like this idea of just breaking down your lifestyle into these little micropayments and we have so many of them now, right? We have so many streaming services. There are so many things that it used to be, you just paid once for it and now you're paying every month or every year for all these subscription services. But if you can figure out the actual cost, minimum viable lifestyle, and how much money you actually have to save to support that lifestyle?

It could be way smaller than you think, or the other way to think about it. As you're building these savings, right? You can and you've got that first $5,000 saved into your TSP, and you think, all right, at least I've got Spotify for the rest of my life. And then maybe if let's say you spend $180 a month on Chipotle that's $50,000.

And once you see that $50,000 in your account, you can think, all right, I got Chipotle covered for the rest of my life. Just another way to break out the finance a little bit and also make the savings a little bit more tangible, right? Because sometimes, we're on this journey to financial independence and maybe our goal number is $800,000.

Maybe it's a million, maybe it's 1.6 million, maybe it's 5 million, right? The idea of as you're like walking towards these, towards these numbers, they're very abstract. It almost becomes meaningless. They're just numbers on a computer screen. But if you can start breaking that into something a little bit more tangible, okay, my family will never go without Spotify. My family will never go without food. My family will never go without housing. And you can start adding those, Maslow's hierarchy of needs, those pyramid blocks, until all you've really gotta work on is that self-actualization, which, that's the hardest one right there, right?

But at least you have those basic needs covered of food, water, shelter, clothing, housing, and all those things. 

So to recap, real quick, We talked today about if you're filing your tax return and it looks like you're going to be getting a tax refund, just take a moment to pause. There are no right or wrong answers, but you want to take a moment to assess your financial situation.

Analyze if you want a lower tax refund the following year, which means that you'll be getting a higher paycheck every first and 15th. Make sure that any spending you do with the tax refund aligns with your goals. So whether that's setting aside the money for an emergency fund, or maybe putting 20% of it towards a vacation, whatever it is, just make sure that you take that moment, you pause and you reflect on how you want to allocate this lump sum.

And then finally, maybe take the opportunity to invest in yourself. As Jamie said, there are lots of courses out there. There are lots of opportunities for you to better yourself as a human being and as a partner or as a family member. And so just take the opportunity that if you wouldn't normally spend $250 on a cooking class with your spouse, but you get a $2,000 tax refund, maybe this is your opportunity to do that.

[00:28:37] Jamie: Speaking of investing yourself. We hope that you've learned a lot from this podcast and we appreciate you joining us each week. We don't charge anything for the course or anything on the podcast. Spencer has a phenomenal travel hacking course that is 100% free. Remember, you can find that at militarymoneymanual.com/umc3, Ultimate Military credit Cards course, and it's a phenomenal one, I think.

Are we over 8,000 total on your course, Spencer? 

[00:29:02] Spencer: 10,000, over 10,000.

[00:29:04] Jamie: I'm sorry, lowballing that big time. Over 10,000 and rave reviews about it. And that's free. So invest in yourself with that free course. And there's a little plug for my friend and his course there. But anyway, thank you for joining us today on this episode where we talked about tax refunds.

If you did get value out of it, the easiest way to say thank you to Spencer and me is by giving us a five-star review on Spotify, Apple Podcast, Audible, or wherever you're listening to this podcast. We also appreciate it when you share it with a friend. Thanks again for joining us and we'll catch you next week.

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