Confused by 2020 Military Income Tax Instructions? Here's What to Do

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An Airman fills out tax forms, Feb. 9, 2017, at Malmstrom Air Force Base, Mont. (U.S. Air Force photo/Daniel Brosam)
An Airman fills out tax forms, Feb. 9, 2017, at Malmstrom Air Force Base, Mont. (U.S. Air Force photo/Daniel Brosam)

A payroll tax deferral put in place by President Donald Trump in late 2020, and corresponding income tax instructions recently issued by the Defense Finance and Accounting Service (DFAS) and the Internal Revenue Service, are causing widespread confusion among military members and families working to file their 2020 tax returns.

The payroll tax deferral was designed to assist people suffering from financial hardship due to the COVID-19 crisis. This meant that for most military members making less than $137,700, Social Security taxes were not taken out of their paychecks from September through December 2020.

That money is now being repaid by withholding it from troops' paychecks over the entire year of 2021. That repayment, however, is not reflected in troops' 2020 W-2 Wage and Tax Statement, issued by DFAS, which is used by individuals to file their income tax returns.

Instead, DFAS says on its website, service members will be issued an amended W-2 for 2020 -- sometime in 2022.

"Per the IRS instructions, if you had only one employer during 2020 and your Form W-2c (Corrected Wages and Tax Statement) for 2020 only shows a correction to box 4 to account for employee Social Security tax that was deferred in 2020 and withheld in 2021 pursuant to IRS Notice 2020-65, no further steps are required," the DFAS website states.

That instruction has caused confusion for many military members and families. Do military members need to delay their tax filings? Or do they need to file an amended 2020 return after the correct form arrives in 2022? The short answer to both questions is most likely no.

With few exceptions, troops should not delay filing their 2020 income tax returns. The regular filing deadline for 2020 taxes is April 15, 2021. The actual filing deadline may be later if the service member is living overseas, deployed or files for an extension. But whenever the deadline is, service members should file taxes on time. As for the amended return and the DFAS instruction, there will be no need for most people to amend their 2020 tax return when they get the corrected 2020 W-2 in 2022.

That's because Social Security taxes are not included in a typical simple income tax return. Federal and state income tax liability is not affected by Social Security tax withholding -- neither the deferral nor the repayment. So, the amended W-2 would come into play only in very special and rare circumstances. If each individual included in your return had only one employer in 2020, and the only difference between the initial W-2 and the corrected W-2 is the Social Security tax withholding shown in block 4, then you do not need to file an amended return.

If you or a family member on your joint return had more than one employer and either you or your family member earned more than $137,700 in 2020, you should check with a tax professional to see if you need to file an amended return for 2020. But even if there's no need to refile, service members should hang on to that amended W-2 when it arrives. The amended W-2 will serve as proof that they've repaid all the taxes that were not withheld in 2020. It should be kept with other tax documents for 2020. (Pro tip: Scan them and keep an electronic copy in addition to the paper copy.) For most people, this Social Security payroll tax withholding deferral and repayment will not affect the 2020 income tax return filing. For those who may be affected, that won't happen until 2022. Keep an eye out for that corrected W-2 to arrive next year.

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