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Military Leave and Earning Statement – You can use it!

Jim’s question:

Are you familiar with how to read a Military Leave and Earning Statement (LES)? We’re trying to assess a borrower who appears to receive a base housing allowance. We’re looking at a year-end LES and when reconciling to the W2 the wage total matches,but we’re afraid we are not getting all of the income (i.e. to cover the housing allowance).

Linda Says:

Jim, I had never seen one until your question, but I did a little sleuthing. It appears to me that the basic housing allowance definitely is not taxable so it is appropriate to add it to the cash flow if you believe their service is continuing.

How Base Housing Allowance is calculated

The Base Housing Allowance is based on the rank,whether there are dependents or not (but not how many) and the typical rents in the area they are living. So while rank, and therefore wages, has an impact it is not the only impact.

The Truth in Lending Act weighs in

Appendix Q, Paragraph C covers “Military, Government Agency, and Assistance Program Income.”

1. Military Income.
a) Military personnel not only receive base pay, but often times are entitled to additional forms of pay, such as:
i) Income from variable housing allowances;
ii) Clothing allowances;
iii) Flight or hazard pay;
iv) Rations; and
v) Proficiency pay.
b) These types of additional pay are acceptable when analyzing a consumer’s income as long as the probability of such pay to continue is verified in writing

Note: The tax-exempt nature of some of the above payments should also be considered.

VA requirements

The VA Loan requirements include an LES that is no more than 120 days old and confirmation that the service member is not within 12 months of release from active duty.

My conclusion

Yes, if you are only using the wages on the w-2 you are likely missing a significant amount of monthly “pay”. Be sure your information is recent and consider if it is continuing, and you should be good to go.

More resources

These military allowances are just one example of non-taxed income. For more on adjusting for nontaxed income, and the other 5 ‘Ns’ to convert Taxable Income into Recurring Cash Flow, check out my free online module:
Green Legos, Six Ns and a Map to Tax Return Analysis.

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.