Military tax breaks

Q. Are there any tax breaks for military folks? — B.T., Salem, Oregon

A. There sure are. For example, any combat pay earned might not count as taxable income — though you can count it when calculating your earned income tax credit, or EITC, which can shrink your tax bill.

Enlisted members, warrant officers or commissioned warrant officers can often exclude other items from taxation; these may include accrued leave pay and repayments on student loans.

Moreover, those in the military either live on base or use a housing allowance that isn’t taxable. Those receiving a monthly “basic allowance for subsistence” (covering meals) get to use it tax-free. Military reserve members may qualify to take early, penalty-free withdrawals from IRA and 401(k) accounts. And those serving in combat zones get an automatic 180-day extension for filing their tax returns, paying their taxes and filing refund claims.

This isn’t formal tax advice, so consult a tax professional for guidance on your personal situation. Learn more in IRS Publication 3 (the Armed Forces’ Tax Guide) at IRS.gov.

Q. What does it mean when a company might be “taken private”? — R.G., Five Forks, South Carolina

A.

When companies first sell shares of themselves to the public, they typically do so via an initial public offering, or IPO. Once public, they’re subject to many regulatory requirements, such as filing regular earnings reports.

But they can revert to being not public, with their shares no longer trading on the public market. That can happen in a variety of ways, including a merger with a private company, or having all the shares bought by a private equity firm; that’s being “taken private.” Companies that have been taken private include the company formerly known as Twitter (now X) and Panera.

Understanding the P/E ratio

It’s always best to invest in a stock when it’s undervalued. That’s easier said than done, though, because there’s no way to find a definitive, universally recognized intrinsic value of a stock. Instead, analysts use a range of tools, some simple and some very complicated, to arrive at estimates — and analyst estimates often disagree.

One easy-to-use metric for individual investors is the price-to-earnings ratio. To calculate a P/E ratio, you simply divide a company’s stock price by its trailing 12 months’ worth of earnings per share.

For example, home improvement specialist Lowe’s earnings per share was recently $10.44, and its recent stock price was around $221. Divide $221 by $10.44, and you’ll arrive at a P/E of about 21. (You could also calculate a “forward P/E” by using next year’s expected EPS, but standard P/E ratios use trailing EPS.)

A P/E ratio of 21 means that at the current stock price, you’re paying $21 per dollar of company earnings. In general, the lower the P/E, the better.

Different industries tend to have different typical ranges of P/E ratios, though: Capital-intensive industries such as automakers will generally have low P/Es, while more capital-light businesses such as software specialists tend to have higher ones. So don’t compare apples to oranges: A carmaker with a P/E of 15 may be overvalued, while 15 can be an attractive P/E for a software company.

Ideally, compare a company’s P/E ratio with those of its peers and with its own P/E over the past few years. The P/E ratio should never be the only measure you assess when making an investing decision, but it can give you a rough idea of a stock’s valuation.