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Pending Bills Could Provide Tax Bennies for Service Members

By Sgt. 1st Class Kathleen T. Rhem, USA
American Forces Press Service

WASHINGTON, Aug. 1, 2002 – Several initiatives in various bills before Congress now could sweeten military members' tax benefits if they become law.

Sure to be the most popular with the troops are proposals to extend combat-zone tax exclusions to Korea and members serving unaccompanied tours outside the United States. Another bill would extend the combat- zone exclusion for troops serving in the Sinai with the Multinational Force and Observers there.

Lt. Col. Tom Emswiler, an Army tax lawyer and executive director of the Armed Forces Tax Council, said tax exemptions are immensely popular with service members but ironically may not be the best thing for the troops or the Defense Department.

"A lot of our junior members don't pay a lot in the way of federal income taxes," he said. "If we're trying to target a problem, there may be more efficient ways than with a broad tax exclusion." He noted, for instance, 75 percent of service members would be better off financially with an additional allowance of $250.

Emswiler said a tax exclusion also would cause a loss of revenue that might be assessed against the Defense Department budget.

Another break addressed in several pieces of pending legislation in both houses of Congress would exempt service members from a normal two- year residency rule for claiming a tax exclusion on a certain amount of profit on a home sale.

Under current law, individuals who live in a house at least two of the five years prior to the date they sell it can exclude a certain amount of their gain from taxes. Each homeowner can exclude the first $250,000 of gain, up to $500,000 for married individuals filing jointly, Emswiler explained.

The current bind for some military members is that owning the home isn't enough -- if military service were to take them away from the home long enough, the two-out-of-five-years rule might disqualify them for this tax break.

A third issue is the exemption from federal taxes of the whole $6,000 death gratuity paid to families of military members who die on active duty. Only $3,000 is tax-exempt now.

Congress enacted Section 134 of the Internal Revenue Code in 1986 to consolidate and clarify which military benefits were tax-exempt. The law states that increases in existing benefits are tax-exempt only if they're the result of an inflation adjustment. The death gratuity was $3,000 in 1986, and inflation indexes were not factors when Congress summarily doubled the benefit during the Gulf War, Emswiler noted.

He said the chances of seeing any of this legislation enacted improved when the House passed the Armed Forces Tax Fairness Act of 2002 by a vote of 413-0 on July 9. The legislation addresses the death gratuity and home-sales issues.

In the month since, senators introduced several tax-relief bills:

  • Sen. Tim Johnson of South Dakota introduced S. 2785 on July 24 to provide a tax filing delay for members of the armed forces serving in a contingency operation.

  • Sen. Jean Carnahan of Missouri introduced S. 2783 on July 24 to restore the tax-exempt status of the death gratuity.

  • Sen. Tom Harkin of Iowa introduced S. 2789 on July 24 to expand the eligibility for membership in veterans organizations so that having these dependents as members does not cause the organizations to lose their tax-exempt status.

  • Sen. Mary Landrieu of Louisiana introduced S. 2807 on July 24 to clarify the tax treatment of DoD dependent care assistance programs.

  • Sen. Max Cleland of Georgia introduced S. 2802 on July 26 to address, among other things, ending the taxation of student loan repayments of service members; covering reservists' travel expenses to and from duty assignments; ensuring military service does not interfere with members' capital gains treatments in home sales; and stopping the taxation of assistance military families receive from the Housing Assistance Program when they are forced to sell their homes at a loss due to base realignment and closure.

  • Sen. Max Baucus of Montana on July 29 introduced S. 2816, which would consolidate proposals of several of the bills above, and add other proposals, into one bill.
The Senate may address these proposals when it returns from recess in September, Emswiler noted.
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