Corrective bill lessens tax burden on military families

PERSONAL FINANCE

November 30, 2003|By EILEEN AMBROSE

MILITARY SERVICE members make countless sacrifices while serving their country, but a new tax law aims to reduce the financial burdens they shoulder in the line of duty.

The Military Family Tax Relief Act was signed into law this month on Veterans Day. The act doubles the amount of death benefits for those killed while on duty, lowers hurdles to qualify for tax breaks on the sale of a home, and makes it easier for reservists and members of the National Guard to deduct certain travel expenses.

Because some tax breaks are retroactive, military families will be able to file amended returns to get refunds.

"It's just a recognition of the fact that there were some provisions of the tax code that were being unfairly denied to the military, inadvertently, and that needed to be corrected," said James A. Seidel, director of federal taxes and specialty products at RIA, a New York company that provides tax information.

Chief Warrant Officer Trisch Garner, the state family program coordinator for the Maryland National Guard in Baltimore, welcomes the new law. Many families, she said, take pay cuts or make other financial sacrifices to serve in the guard.

"Anything that can benefit them financially is of great significance," she said.

Here are some highlights:

Travel expenses. Previously, reservists and members of the National Guard faced a couple of hurdles if they wanted to deduct overnight travel expenses while on duty. They had to file an itemized return. Plus, these expenses were lumped with miscellaneous deductions and deductible only by the amount that they exceeded 2 percent of adjusted gross income.

No more. Beginning this year, expenses incurred while traveling more than 100 miles and requiring an overnight stay away from home can be deducted without filing an itemized return. This is a boon to service members, especially singles, whose finances were not complicated enough to warrant an itemized return, Garner said.

It's also the priciest provision of the new law, and is expected to cost the federal government $851 million over 10 years, said Mark Luscombe, a principal analyst with CCH Inc., a tax information company in Illinois.

Death benefit. The military death benefit for those killed in combat, in training or in transportation accidents while on duty increased to $12,000 from $6,000. Survivors also won't have to pay taxes on any of the money.

This fixes a glitch in the 1991 law that doubled the death benefit to $6,000 from $3,000, but left survivors to pay taxes on half of that, Luscombe said.

Families were often surprised to find they owed taxes on a portion of death benefits, Garner said.

The benefit is retroactive to Sept. 11, 2001. Families who lost a service member in the past two years and are eligible for an increased benefit will be located and sent the additional payment, said Jim Turner, a Defense Department spokesman.

To receive a refund of taxes paid on death benefits, families can file an amended return using Form 1040X and reduce their adjusted gross income by $3,000, the IRS said. To speed processing, write "Military Family Tax Relief Act" at the top of the form.

Home sales. An individual can shield from taxes up to $250,000 of gain from the sale of a primary residence. Married couples filing jointly can exclude up to twice that amount. To qualify for this tax break, though, sellers must have lived in the house for at least two of the five years prior to the sale.

Military families called away for extended duty sometimes couldn't meet this residency requirement and didn't get the full benefit of the tax break.

The new law eases this residency requirement. Service members called away on extended duty - at least 50 miles from home - must still have occupied the house for two years for it to be considered a primary residence. But, depending on how long they were away on duty, those two years can have accumulated during up to 15 years before the house is sold to fulfill that requirement.

"This is significant. There are many of our people who have to sell their homes. That's money back in their pocket for groceries and [living expenses]," said the National Guard's Garner.

This tax break applies to homes sold after May 6, 1997. Generally, taxpayers have three years after filing to amend a tax return. Taxpayers who sold their homes several years ago and are outside the three-year limit will have until Nov. 10, 2004, to file a claim for a refund, Seidel said.

Those who don't have a copy of an old return can get one by filing a Form 4506 with the IRS. This form and the 1040X amended return form are available online at www.irs.gov or by calling 1-800-829-3676. As with the death benefits, filers should write the name of the tax act at the top of the amended return.

Home reimbursements. The value of houses owned by military families can plummet when a base closes or cuts operations. To lessen the blow, a Defense Department program reimburses these families for losses when they are selling a house whose value has dropped because of a base closure or reduction.

Under the new law, the reimbursements are not considered taxable income. This is not retroactive and applies to reimbursements made after Nov. 11, when the law was signed.

Dependent care. The Defense Department provides dependent care assistance to members of the armed forces. The new law clarifies that this fringe benefit won't be counted toward a service member's income and subject to tax, Luscombe said.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.

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