Tax Breaks Available for Those Who Serve Their Country

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Tax Break

With Veterans Day approaching, now is an appropriate time to review the tax benefits available to members of the Armed Forces who serve our country. President Bush signed into law the Military Family Tax Relief Act of 2003 in November of last year. The benefits of the Act range from helping military personnel manage the costs of homeownership and dependent care to education costs and travel expenses. Highlights of the Act follow, provided by the Colorado Society of CPAs.

Death benefits increased

The 2003 Military Family Tax Relief Act increases from $6,000 to $12,000 the amount paid to survivors of deceased members of the Armed Forces. This change applies to deaths after September 10, 2001. In addition, the entire $12,000 benefit is excludable from income. Previously, only $3,000 was excludable.

Tax return filing date is extended

Military personnel stationed in combat zones receive additional time to file and pay federal income taxes - 180 days after the later of the last day you are in a combat zone, have qualifying service outside of a combat zone, or the last day of any continuous qualified hospitalization for injury from such service. In addition, any days that are left on the normal 3 1/2 month period to file your return when you entered the combat zone are added to the 180-day period. You may be able to file a refund claim if tax was paid on a death gratuity received as a result of a death that occurred after September 10, 2001. The 2003 Act extends this benefit to military personnel involved in contingency operations.

Special tax treatment available for military homeowners

The 2003 Act eased the tax rules on a sale of a personal residence for soldiers called to qualified extended duty at least 50 miles from home. Under current tax rules, taxpayers can exclude up to $250,000 ($500,000 for joint filers) in gain from the sale of a principal residence. To qualify, the homeowners must own and live in the house for at least two of the five years ending on the date of sale. Many military men and women find it difficult to meet this residency requirement. To address this issue, Congress revised the rules. As a member of the military you still must have lived in your home for at least two years, but you can suspend the five-year period for up to 10 years. That means military personnel who have lived in their homes for two out of up to 15 years may qualify for the capital gains exclusion. This special election is effective for sales made after May 6, 1997, so qualifying taxpayers who paid tax on a gain from a sale after that date may be able to claim a refund. But hurry - November 10, 2004 is the deadline for amending tax returns for years 1997 through 2000 for this purpose.

Reservists can deduct travel expenses

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Membership in the National Guard and Reserve often requires travel and not all of those expenses are reimbursed by the military. Under a special provision in the Act, reservists who must travel more than 100 miles from home and stay overnight may deduct unreimbursed travel expenses, including meals, lodging and transportation, up to the per-diem allowances.

Previously, such expenses were deductible only as an itemized deduction, subject to the 2 percent of adjusted gross income limitation. Effective January 1, 2003, reservists can take the deduction regardless of whether they itemize.

When home prices decline

The Department of Defense Homeowner's Assistance Program is a special program that makes housing assistance payments to compensate military service members when home values decline as a result of the partial or complete closing of a military base. Under the 2003 Act, such payments made after November 11, 2003 are excluded from income. However, the exclusion amount cannot be more than 95 percent of the fair market value of the property before public announcement of the intent to close all or part of the military base or installation, minus the fair market value of the property at the time of sale.

Dependent Care expenses are tax-free

The Military Family Tax Relief Act also clarifies that the dependent care assistance provided to members of the Armed Forces is not included in their income.

Military Academy Enrollees eligible for waiver of penalty

There is a 10 percent tax on payments received from a Section 529 Plan or a Coverdell Education Savings Account when the proceeds are not used for qualified educational expenses. A provision in the 2003 Military Family Tax Relief Act waives the penalty for individuals who are appointed to the U.S. Military, Naval, Air Force, Coast Guard, or Merchant Marine Academies.

Additional information available

If you or someone you know has questions concerning benefits for military personnel, visit www.irs.gov or contact a CPA.

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