Friday, February 23, 2001

By Lisa Burgess
Washington bureau

WASHINGTON — Just as there are no free lunches, there’s no such thing as a tax-free bonus from the government, either — including the new $30,000 bonus that military personnel reaching their 15th year of service can elect in exchange for receiving only 40 percent of their salary as pension when they retire at 20 years, instead of 50 percent.

Not all the news is bad, however.

The government is giving a pass to servicemembers doing duty in tax-free zones, and even those people who aren’t on hazardous duty will be allowed to shelter as much as $10,500 of the bonus in a tax-deferred account that can be tapped after retirement, when tax brackets tend to drop.

Anyone who entered military service on or after Aug. 1, 1986 and has completed 15 years on active duty is eligible for the 15-year Career Status Bonus, or CSB.

In order to receive the money, a servicemember has to pledge in writing to complete a full 20-year tour of duty. If that person quits before 20 years are up, he will have to repay all or part of the bonus back to the government. This month, the Pentagon began notifying the first group of people eligible for the program.

The Internal Revenue Service will regard the entire $30,000 bonus as additional income in the year it is received, Blair said. That means people who accept the bonus will have to add it to their base pay for that year when determining their tax bracket.

Moreover, the government will take its chunk of the cash upfront.

A percentage of the bonus, based on a servicemember’s regular withholding rate, will automatically be sent to government, so that the actual amount a person receives will be less than $30,000.

If too much is withheld, the IRS will include the excess as part of the regular federal tax refund. with the person files his tax returns for the year.

One group of servicemembers will not be asked to pay full taxes on the bonus: those who are serving in combat zones or Qualified Hazardous Duty Area zones.

For those people, the bonus will be taxed at whatever rate the individual’s base pay is taxed, which for enlisted members may be zero percent, according to Pentagon spokesman Maj. Timothy Blair.

Meanwhile, there are two avenues of escape for people who don’t wish to see their entire bonus subject to federal taxes.

The first is to deposit the maximum allowable sum, $2,000 per year, in a sanctioned IRA account, which is tax-deferred until retirement.

Any withdrawals from IRAs before age 59 and a half are subject to immediate taxation plus a 10 percent penalty.

The second way to make the most of the bonus is to sock $10,500 — the maximum allowed in 2001 — into the Pentagon’s new thrift savings plan, which is the Defense Department’s version of an IRA. The plan is scheduled to begin on Oct. 1.

Current plans for the thrift savings program allow a member to deposit 5 percent of basic pay and any amount from special and incentive pays and bonuses into the tax-deferred account up to the IRS limit, currently $10,500 per year.

In order to allow people who elect to receive the $30,000 bonus before the thrift savings plan is operational to shelter the maximum amount of their bonus, Pentagon payroll officials are working on an option that would allow such individuals to defer receiving the money until Oct. 1, Blair said.

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