Military Family Tax Relief Act of 2003

The Military Family Tax Relief Act of 2003 was signed into law on Veteran's Day, November 11, 2003. This new law provides tax breaks to active-duty military personnel, reservists, and certain civilian employees of the Armed Forces. Special tax relief for Space Shuttle astronauts who die in the line of duty was also included.

Several of the provisions are retroactive to earlier tax years.

Note: Other provisions were included in the bill as follows. These provisions are not discussed in this article:

• Expansion of the definition of organizations qualifying for exempt status as veterans' organizations.
• Suspension of the tax-exempt status of terrorist organizations.
• Extension of customs user fees.

Capital Gain Exclusion for Home Sale
Effective for sales occurring after May 6, 1997

Military personnel may make an election to suspend the running of the five-year period during the time the taxpayer or his or spouse is serving on qualified official extended duty. The period cannot be extended for more than ten years.

Qualified official extended active duty means any extended active duty at least 50 miles from the residence or while living in Government-ordered Government quarters. The call or order of duty must be in excess of 90 days or indefinite in length.

Example: Tom and Susan DeLong purchased their home in January 18, 1996. On March 6, 1998, Tom was assigned to extended active duty in Germany, where he lives with his wife in base housing. The couple rented their home until November 4, 2002 when it was sold. Prior to the law change, the DeLongs could not have met the two-year use test because they've been out of the home more than three years. Under the new law, they may ignore the 3 years and seven months that they were in Germany. Because they meet the two-year use test for the period that is counted, they may exclude the gain on the sale of their home under the usual rules.

Making the election
More information on how the election is made is expected soon. One important note is that the election may be in effect for only one property at a time. The election may be revoked at any time.

Important: Returns for closed years, including previously audited returns, may be amended within one year of the date of enactment.

Tax-Free Treatment of Death Gratuity Benefits
Effective date: September 11, 2001

Under current law, survivors of members of the military receive a $6,000 death gratuity payment, but only half of it is tax-free. Under the new law, the amount of such payments received for deaths occurring after September 10, 2001 is increased to $12,000 and the benefit is fully exempt from tax.

Important: Because the new law is retroactive to 2001 and 2002, families who received payments for deaths that occurred after Sept. 10, 2001 but before 2003 should amend their tax returns to remove the $3,000 of taxable income that was included on their returns. The reduced adjusted gross income (AGI) and tax liability may affect other items on the return as well.

Tax-Free Treatment of "HAP" Payments
Effective for open years (2000 forward)

Amounts received under the Homeowners' Assistance Program may be a tax-free fringe. HAP payments are made to compensate military personnel and certain civilian employees for a drop in home values resulting from military base closures or realignments.

The bill provides that these payments are tax-free to the extent the amount does not to exceed:

• the difference between 95% of the fair market value of their property prior to public announcement of intention to close all or part of the military base or installation and the fair market value of such property (as such value is so determined) at the time of the sale, or
• the purchase price for their property, not to exceed 90% of the prior fair market value or the amount of the outstanding mortgages.

Payments to reimburse the homeowner for the costs of selling the property are not excludable under the new law.

Important: 2000 tax year returns affected by this change must be amended by April 15, 2004.

Extension of Combat Zone Filing Rules to Contigency Operations
Effective for open years (2000 forward)

Prior to this law change, several deadlines such as those for filing tax returns and making tax payments were extended for certain individuals serving in a combat zone during a period of combatant activities. The new law extends the provision to such individuals serving:

• outside the United States away from his or her permanent duty station,
• while participating in a contingency operation.

A contingency operation is defined as "military operations designated by the Secretary of Defense in which personnel are or may become involved in military actions during a war or national emergency declared by the President or Congress or which become a contingency operation by operation of law."

This change primarily affects penalties and interest imposed on late returns and late payments. Taxpayers affected by this change may amend their tax returns to request recalculation and abatement of penalties and interest. Tax year 2000 returns must be amended by April 15, 2004.

Overnight Travel Expenses of Military Reservists
Effective date: January 1, 2003

For expenses incurred after 2002, an above-the-line deduction is allowed for non-reimbursable travel expenses for military reservists who serve more than 100 miles away from home and stay overnight. Expenses cannot exceed the rate for travel expenses, including per diem in lieu of subsistence, for government employees.

Distributions from QTPs and Coverdell ESAs
Effective date: January 1, 2003

Appointments to a military academy are treated like scholarships for purposes of the exception to the 10-percent penalty related to QTP and ESA distributions. Under the provision, distributions from a QTP or ESA are not subject to penalty to the extent the distribution does not exceed the cost of attending the academy.

Dependent Care Benefits
Effective date: January 1, 2003

The new law specifically provides that dependent care assistance provided under a military dependent care assistance program is a tax-free benefit. This provision is effective for tax years after 2002.

Tax Relief for Space Shuttle Heroes
Effective for deaths occurring after December 31, 2002

The tax forgiveness provisions that were enacted for individuals killed in terrorist attacks is extended to any astronaut who dies after December 31, 2002 when the death occurs in the line of duty.

Under the law, the tax imposed in the year of death of a qualifying individual is forgiven in full. A minimum $10,000 benefit is allowed. Estate tax relief also applies.

State Tax Law Changes Related to Military Personnel

Virginia: Tax Deferrals For National Guard Members

On March 20, 2003, the governor signed into law legislation that extends tax deferral and leave time protection benefits to certain National Guard members.

Tax Deferral
National Guard personnel who are unable to pay their state taxes because of their military service may apply for deferral of those taxes. The individual must prove both the inability to pay to the tax and that the inability to pay is a result of military service.

Federalized National Guard members qualify for this deferral under the Federal Soldier's and Sailor's Civil Relief Act. Virginia National Guard members who are called to active duty for more than 30 days but who are serving on active duty for the state of Virginia.

State employee leave time
Full-time Virginia state employees serving in the National Guard are allowed to carry forward their leave time without limitation.

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