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Special Military Payment Affects Soldiers’ Tax Returns
Many tax professionals and soldiers are unaware of the Retroactive Stop Loss Special Pay (RSLSP) and how it can affect their 2010 tax return.
Between September 11, 2001 and September 30, 2009, many service members’ duties were involuntarily extended under the presidential authority called the Stop Loss program. Stop Loss gives the military the right to extend a soldier’s active duty service beyond their normal separation or retirement dates that are stated on their enlistment contract. The military uses Stop Loss in order maintain troop size/strength when enlistment and re-enlistment is low.
Active, reserve and veteran service members, as well as their beneficiaries, who had their enlistment extended or retirement suspended due to Stop Loss are eligible for this special pay if they served on active duty between September 11, 2001 and September 30, 2009. The RSLSP benefit provides $500 for each full or partial month served in a Stop Loss status.
Tax professionals should be aware of this payment. Eligible taxpayers who placed a claim and received the special payment in 2010 will be mailed a W-2. The W-2 for RSLSP will be separate from an active service member’s primary W-2. All funds received for RSLSP will be reported and itemized on the W-2 and listed as taxable (box 1) or tax-exempt (box 12, code Q) and must be reported on the 2010 tax return. Time that was not spent in a tax-free combat zone is subject to federal and state taxes. Also, federal and state taxes have been withheld from the initial payment and are listed on the W-2. Depending on how long service members were on Stop Loss, their payment could bump them into a higher tax bracket or affect earned income tax credit eligibility.
Many of those eligible were under the impression that this special payment was going to be completely non-taxable when they applied—now they are receiving their W-2s and are surprised to see that a portion (or all of it) is taxable. Some recipients could still be under the assumption that all of it is non-taxable and fail to provide this W-2 to their tax professional. Tax preparers that have clients on active duty or that are veterans should question them about this payment. Also, some service members have received a W-2, but have not received their special payment in 2010. If this is the case, the service member will have to contact the Defense Finance and Accounting Service (DFAS) for a corrected W-2.
When the RSLSP began on October 21, 2009, the armed services estimated that 145,000 members would be eligible to receive this special pay. Of the $534.4 million set aside for RSLSP, only $219 million in claims have been paid as of December 2010. The claim date has been extended several times and is now listed at March 4, 2011. This is a perfect opportunity for tax professionals to reach out to their clients to let them know about this special pay. It is clear that many service members are unaware that this benefit is available. Tax professionals should also let their clients know that many service members have vocalized their disappointment with the online claim system, and payments are taking over four months for processing (when no issues arise). If a service member is denied or receives a smaller payment than originally claimed, a reconsideration form can be filed.
Further information regarding the RSLSP program can be found at the U.S. Department of Defense website (http://www.defense.gov/
This article contains general tax information for taxpayers. Each tax situation may be different. Do not rely upon this information as your sole source of authority. Please seek professional advice for all tax situations. Tax professionals are experts who keep current on tax law changes. They can save you time and offer insight on how to use the tax breaks available to you. To find a professional tax preparer, look to NATP whose members subscribe to a strict code of ethics and standards of professional conduct (read them in the Press Room at www.natptax.com)
Members of the National Association of Tax Professionals (NATP) work at offices that assist over 11 million taxpayers with tax preparation and planning. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. NATP has more than 20,000 members nationwide. Members include individual tax preparers, enrolled agents, certified public accountants, accountants, attorneys, and financial planners. As a nonprofit professional association, NATP serves professionals working in all areas of tax practice through professional tax education, tax research, and tax office supplies. The national headquarters, located in Appleton, WI, employs over 45 staff members. Learn more at www.natptax.com.
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Members of NATP work at offices that assist over 11 million tax payers with preparation and planning. NATP has more than 20,000 members. Members include tax preparers, enrolled agents, certified public accountants, attorneys, and financial planners.