BLUF: Am I exempt under IRS Code Section 121 from paying taxes on the realized gain for both federal and state tax withholding if I am PCSing on official military orders?
More detailed version: I am active duty Army, I have been stationed at Fort Jackson, SC since August of 2018, I PCSed to Fort Wainwright, AK, and reported on 10 October 2021. My house is currently under contract and will tentatively be closing on 22 October 2021. My house will be selling for $201,000, I owe $153,000. My uneducated math, after closing costs and fees gives me a realized gain of roughly $31,000. I submitted the South Carolina form I295 per the closing law firm's request. I was overwhelmed with the info on this form as I am tax illiterate so I called a tax professional at MilitaryOneSource to have them help me decipher this form. The Tax pro told me that I should check "block 15" indicating that I am exempt from paying taxes on my realized gain due to IRS Code Section 121. When I returned this form to the closing law firm they responded with this:
You previously returned your I-295 form indicating that withholding will not apply due to your military status. Although we cannot advise on your tax withholding, military status has not excluded individuals from this withholding requirement in the past. If you will recognize a gain from the sale of this property, you will need to indicate the AMOUNT of the gain on that form. BCPC will be required to withhold 7% of your gain from EITHER your net proceeds OR the amount of the GAIN you indicate, and file that with the SC Department of Revenue. In your package, your seller closing disclosure and your closing statement currently show this withholding on your total proceeds. Please complete the affidavits and affirm either your declared gain or your taxable status, we can update your final statement accordingly. Your final statement will be sent to you via DocuSign for your eSignature on the day of closing.
Now I am not sure what to do, they emailed me several forms changing my tax status to "Resident" even though I have been paying Iowa state taxes the entire duration I was stationed in South Carolina and at no point became a resident of South Carolina. I am stressed because the law firm is not helping me understand any of this paperwork, they are not responding to emails or answering the phone. If anyone can help educate me, I would deeply appreciate it.
Am I exempt from federal and state withholding? If I am not, then which block should I indicate? Block 12 perhaps?
I also posted this in /r/tax but I know there are a LOT of smart people in this sub and thought it was still an appropriate place to ask.
Edit 1: Added hyperlink for I295
Submitted October 12, 2021 at 11:14PM by Sunshine649 https://ift.tt/2X7VeZ1
