Tax Relief Act Works for Low-Income Troops in Combat Zones
By Samantha L. Quigley
American Forces Press Service
WASHINGTON, Oct. 14, 2004 Troops in combat zones stand to reap tax benefits from provisions in the Working Families Relief Tax Act of 2004, which President Bush signed into law Oct. 4.
Income earned in combat zones is not taxed. However, the Child Tax Credit and the Earned Income Tax Credit are dependent on taxable-income figures. This had previously left a number of servicemembers at a disadvantage, Army Lt. Col. Janet Fenton said.
"When servicemembers are in combat zone areas, they have a lot of their earned income excluded for income tax purposes. These two particular credits, in order to qualify for them, require you to have income that's included for income tax purposes as gross income," said Fenton, executive director of the Armed Forces Tax Council. "So a lot of our junior members were losing out on these tax credits because it appeared for tax purposes that they did not have (enough) taxable income."
The Earned Income Tax Credit affects many servicemembers, and the CTC applies to anyone with a qualifying child. When considering the EITC, servicemembers can elect to include or exclude their tax-exempt pay earned in a combat zone, whichever will provide the greatest benefit.
It might seem contradictory to include income to qualify for a low-income tax credit, but a taxpayer must have taxable earned income to report. This was a problem for many servicemembers in a combat zone because, while their salaries fell under the cap, it appeared for tax purposes that they did not have taxable income, Fenton said.
While those with children will find the greatest benefit from EITC, the credit shouldn't be dismissed just because there are no children in the family. It is still possible to qualify, but the income cap is much lower and there is an age requirement that must be met.
If servicemembers are eligible for the CTC, they do need to be aware that it is different than the EITC in regard to the combat zone pay situation, Fenton said. Including combat zone pay as part of total wages is not optional for the CTC. However, the formula to determine CTC has been reworked, and the amount that is refundable has been increased from 10 percent to 15 percent.
This could easily work in servicemembers' favor because, again, many appeared to have no taxable income and were losing out on this credit because they weren't earning enough to qualify.
"This way, we suspect that more junior members will actually qualify for a portion of the refundable tax credit," Fenton said.
The 2004 Act extended the CTC at $1,000 per qualifying child through 2010. The previous amount was $700 per child.
Fenton said officials have estimated that 114,989 servicemembers will qualify for these tax credits. The estimate only takes into account military incomes of less than $35,000 if the servicemember is not in a combat zone. It also does not take into account a spouse's salary.
She said the Defense Finance and Accounting Service will make it easier to determine what was taxed and what wasn't by reporting tax-exempt pay earned in a combat zone in box 14 of each servicemembers' W-2 form.
"We don't want to confuse people with this election (of inclusion or exclusion of pay). Their (combat zone income) is still excluded for income tax purposes," she said. "It's only included to see if they can qualify for the additional credit."
This rule change is not retroactive, Fenton said. No amendments can be filed for previous tax years.