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Advance Pay: The Payday Loan That Isn’t

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Your PCS orders have finally arrived!  Look out!  Here comes your “friend” to give you the inside track on how to make a little money at the government’s expense.  “Advance pay, man!  It’s an interest-free loan from Uncle Sam!  Invest it, dude, or get that computer you’ve been looking for.  Interest free, baby!  That’s free money!” Consider this fair warning: following this “friend’s” advice could land you in hot water, and I don’t mean the Jacuzzi you think you can now afford.

Advance pay is not an interest-free payday loan, although many people seem to think it is. So what then, you ask, is advance pay?  At the risk of sounding horribly patronizing, it is what it says: an advance on your pay.  You are given a portion of your normal pay in advance.  Why have advance pay? No need to re-invent the wheel here, just take a gander at Marine Corps Order 7220.21E: advance pay “is intended to assist with out-of-pocket expenses that exceed or precede reimbursements incurred during a PCS move which are not typical of day-to-day military living.” 

The typical advance pay is one month’s basic pay that is paid back over the course of a year. DoD Instruction 1340.18 provides a maximum advance pay of three month’s basic pay paid back over 24 months.  According to the instruction, all requests for advance pay have to be substantiated.  That is to say you must stipulate what you will use the advance pay for.  Anecdotal evidence suggests a month’s worth is more or less automatic, however.  If you ask for the maximum amount, your CO is directed by the afore-mentioned DOD instruction to ask what you will use the money for.

“What for” is also provided in the DOD instruction.  Examples of appropriate reasons to request advance pay include “a house or apartment hunting trip, supporting two households when the Service member is unable to rent or sell the house at the old duty station, the down payment on purchase of a house, or excess household goods shipment charges.”  Living in San Francisco, the “down payment on a house” makes me laugh every time I read it, but note how these reasons tally extremely well with the reasoning in the Marine Corps order above.

Now we come to the “interest-free loan” question.  Advance pay is, strictly speaking, an interest-free advance on your pay, not a loan.  An advance is a payment to you of your own money you haven’t earned yet.  Your paycheck is then “docked” one-twelfth of one month’s pay until you’ve paid it back.  A loan is money you haven’t yet earned, and that will have to be re-paid, usually with interest.  Clear as mud?  It’s not free money, it’s your money, albeit without interest due.

There is a tax implication to advance pay as well.  Your advance pay counts as income, and thus is subject to tax.  IRS Publication 525 says if you repay an amount you included as income in an earlier year (in this case your advance pay), you may claim the repayment amount as a tax deduction in the year you re-paid the money.  If your repayment amount was over $3,000, different rules apply, and you should consult Publication 525 or a tax pro. Make sure you contact a tax professional if you have questions about anything tax related.

The Jacuzzi?  The investments?  The free money? DOD instruction 1340.18 is explicit: “An advance of pay is not intended to provide funds for such items as investments, vacations, or the purchase of consumer goods that are not the result of direct expenses resulting from the Service member’s PCS orders.”  If you claim you are using the advance pay for one the approved reasons and then use it to buy a Jacuzzi or invest in pork belly futures, you, and your “friend” with the good advice, might expect a visit from the JAG.  You both may be charged with violation of any number of Articles of the UCMJ.

Make no mistake – that “good advice” your friend gave you about advance pay being a good way to make a little money should be filed away in the same place you put his advice about filling your trunk with cement when weighing your household goods.

If you’ve got advance pay questions, your finance office will have all the answers you need.  You can receive advance pay 30 days before you PCS and up to 60 days after you report to your new command, so if during the move you find your expenses are greater than you planned, help is available.  Advance pay can be a big help at a time when you really need some.  Don’t abuse it.  And while you’re at it, get a new friend.