This past Veterans Day, President George Bush signed into law the Military Family Tax Relief Act of 2003.
This new law provided a number of relief provisions for our fighting
men and women. Many of you have friends and family in the
military, so make sure that you pass this article along to them so they
can be aware of the new tax breaks available to them.
Home sale tax exclusion
Since 1997, Americans have been able to exclude the gain from the sale of a principal residence
as long as certain qualifications were met. One of those
qualifications required that the homeowner lived in the
residence for at least two of the five years immediately preceding the
sale of the residence. While there are provisions to allow for a
partial exclusion if the two-year requirement isn't met, and
if the move is required for business or work-related
reasons, that relief was not extended to military or foreign
service personnel. But that oversight has been corrected with the new
law.
Military and foreign service personnel may now make an election to
suspend the running of the five-year holding period while the taxpayer
or spouse is on a qualified official extended (i.e., more than 90
days) duty assignment. The holding period suspension can be for a
maximum of 10 years. The election applies retroactively to
1997, and if a qualifying member was required to pay
taxes because of the holding period rules, an amended return can
be filed in order to recoup those taxes paid. This is true even if
the prior return is beyond the statute of limitations. In
other words, qualifying taxpayers who sold a residence before 2001
have until Nov. 10, 2004, to amend their returns for this purpose.
Taxability of death benefits
The death benefit
(called death gratuity benefit) paid to the survivors of a member of
the military killed in the line of service after Sept. 10, 2001,
increased from $6,000 to $12,000. Under the new law, the entire amount
of the benefit is not subject to tax (under the old law, only $3,000 of
the $6,000 total benefit was tax-free). Again, note that this new
provision is retroactive to 2001. That being the case, an amended
return might be in order to exclude all of the death benefits received
in prior years.
Combat zone filing rules
Generally, military
personnel stationed in a combat zone receive an extended period of time
for the filing and payment of federal income taxes. The new law also
provides this extension to military personnel involved in contingency
operations (e.g., Operation Iraqi Freedom or Operation Enduring
Freedom) as designated by the secretary of Defense.
Military academy penalty waivers
The new law waives the normal 10% penalty for payments received from a Qualified Tuition Plan or Coverdell Education Account
that are not used for qualified education expenses for attendees of the
U.S. Military, Naval, Air Force, Coast Guard, or Merchant Marine
Academies. The penalty waiver is effective for 2003 and subsequent
years.
Reservists travel expenses
Members of the
National Guard and other similar reserve units are often required to
travel as part of their service obligation. These travel expenses can
be significant, and often they are not completely reimbursed by
the military. While these unreimbursed expenses could be claimed as a
miscellaneous itemized deduction, they would only provide tax relief if
the taxpayer itemized deductions. And even then, those expenses would have to pass the 2% of AGI test.
This is no longer the case. Effective Jan. 1, 2003, there is an
"above the line" deduction for overnight travel costs incurred for
travel that is more than 100 miles from the taxpayer's home, including
meals, transportation, and lodging up to the amount allowable as
per-diem allowances. This means that the taxpayer will no longer be
forced to itemize deductions in order to receive a tax benefit from
these business expenses.
Exclusion for amounts received under HAP
The
Department of Defense makes payments under the Homeowner's Assistance
Program (HAP) to compensate qualifying uniformed services members and
federal employees for the loss in value of a qualifying residence at or
near a military base or installation that is caused when the base or
installation is partially or totally closed. Under the new law, HAP
payments received after Nov. 11, 2003, are not considered taxable
income and will be treated as a non-taxable fringe benefit. There are a
few strings associated with this provision, so make sure you're totally
qualified to exclude this income if you're receiving HAP payments.
There are also a few other provisions regarding terrorist
organizations and astronaut relief, but since very few of you have
either astronauts or terrorists in your circle of friends and family,
we won't go into those provisions for the time being. But you can
clearly see the potential tax savings for the men and women who risk
their lives to protect our freedom. So make sure that you spread the
word about the new tax breaks applicable to those serving in the
military.
Related Links:
Armed Forces Tax Relief
10 Ways to Cut Your Taxes
Home Sale Rules Clarified
More Home Sale Rules Clarified
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December 12, 2003
