With our armed forces engaged in a war in Iraq, it's an appropriate time to discuss various tax breaks and protections allowed to those who selflessly serve to protect our liberties. While these tax issues may not affect you directly, you just might have a friend or family member that can benefit from the rules noted here. If you do, please pass along this article to them, along with my sincere and heartfelt thanks for all they are doing for us back home.
The first document that any member of the armed forces should read is IRS Publication 3 -- Armed Forces' Tax Guide, which outlines many of the issues that affect our men and women in uniform. Some of the more beneficial provisions include:
Exclusion from income: Pay that you receive for being in a combat zone, living and family allowances, moving and travel allowances, and certain other payments that you receive can be excluded from income that must be reported for tax purposes. In effect, these types of payments, with certain limitations, are tax-free.
Travel expenses for reservists: You can deduct travel expenses if you are under competent orders, with or without pay, and away from your main place of business overnight to perform drills and training duty. If you are called to active duty, you can deduct travel expenses if you keep your regular job while on active duty, return to your job after release, and are stationed away from the general area of your regular job or business. However, you can deduct these expenses only if you pay for them at your official military post and only to the extent the expenses exceed your basic allowance for housing or subsistence.
- Combat zone tax forgiveness: If a member of the armed forces dies while in active service in a combat zone or from an injury received in a combat zone, that person's income tax liability is forgiven for the tax year in which death occurred. Additionally, tax forgiveness is also allowed for earlier tax years under certain circumstances. Any forgiven tax liability that has already been paid will be refunded, and any unpaid tax liability at the date of death will be forgiven.
These are only three of the many special tax provisions that affect members of the armed forces. IRS Publication 3 will provide you with many others. But other protections exist under the Soldiers' and Sailors' Civil Relief Act of 1940. While many in the armed forces are aware of the tax issues relative to their service in the military, some are still not familiar with the protections provided by the Civil Relief Act.
This act was originally designed to protect soldiers and sailors on active duty so that they could focus on defending the country. The act applies to service members on active duty from the day they enter the military to the day they leave. The act also covers members of the Coast Guard, the National Guard, and others when they are on active duty.
Some of the major highlights of the Civil Relief Act include:
Reduced interest rates on mortgage loans and credit card debt: That's right, certain members of the armed forces might be able to get some relief from those 20% credit card interest rates. This provision (generally, but not exclusively, provided to reservists) requires you to show your creditors how active military service affects your ability to meet your financial obligations. There is some paperwork involved; you are required to notify your mortgage lender and credit card companies in writing of your intention to invoke the 6% interest rate cap under the Civil Relief Act. Additionally, various documents are required to be provided to the mortgage lenders and credit card companies, including proof of activation to active-duty status and reduced income. But if you are facing a financial hardship because of your service, this provision might just help to ease that burden.
Protection from eviction: The act prohibits lenders from foreclosing against any military personnel during and immediately following their tour of active duty. It also helps military renters by ensuring they cannot be evicted from their property. The act also allows military renters to terminate leases without penalty.
- Delay of civil court actions: Service members involved in civil litigation (such as breach of contract, bankruptcy, foreclosure, or divorce proceedings) can request a delay in proceedings if they can show their military responsibilities preclude their proper representation in court.
Find out more about the Soldiers' and Sailors' Civil Relief Act of 1940 at the Department of Defense website. Military service is difficult enough. Don't overlook some of the financial benefits and protections that are available to you while you are serving our country.
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.