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.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.
