New Tax Act Benefits Military Personnel

Members of the military will get a battery of new tax breaks thanks to a bill signed into law by President Bush on Veterans Day.

The Military Family Tax Relief Act of 2003 doubles military death benefits and shelters them from tax; creates new deductions for National Guard and reserve troops; and refines the rules related to several tax deductions in ways that help military families.

“Our nation is relying on the military in unique ways,” said Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee and a sponsor of the law. “The sad fact is these folks don’t get a fair shake under the federal tax code.”

Many of the changes are retroactive, allowing some military families to obtain refunds on taxes they have already paid.

Here are the law’s major provisions:

* Emergency military death benefits have been doubled, going to $12,000 from $6,000. These payments are made to families of soldiers who die in combat and to families of those who die in training or transportation accidents.

The payments also are now completely tax-free. In the past, only $3,000 was exempt from federal income tax.

These changes are retroactive to Sept. 11, 2001, so the families of service personnel who have died in the last two years will receive additional checks from the Department of Defense, said George Jones, senior tax analyst with the Washington office of CCH Inc., a publisher of tax information.

In the meantime, those who paid taxes on past death benefits should file amended tax returns to claim their refunds.

* A new deduction was added for members of the National Guard or reserves who are required to travel overnight at their own expense to a destination more than 100 miles from home. This deduction, which can be claimed even if the taxpayer doesn’t itemize, has no set dollar limit, but it can’t exceed the per diem rate that the federal government has established for the destination city.

The deduction is retroactive to Jan. 1, but it won’t be a line item on forms for the 2003 tax year. Taxpayers who qualify for the deduction should enter it on Line 33 of their 1040 forms, said Internal Revenue Service spokeswoman Nancy Mathis.

* Home sale rules were modified to make it easier for active-duty military members to claim the so-called residential exclusion. Homeowners can exclude from federal taxes up to $250,000 in profit from the sale of their personal residences.

However, to qualify as a personal residence, a house has to be occupied by the homeowner for at least two of the last five years -- a restriction that many active-duty personnel have trouble meeting because they are stationed away from home for long stretches.

The change gives military personnel and members of the U.S. Foreign Service five additional years to establish residency, said Mark Luscombe, principal tax analyst at CCH. The result: Uniformed and Foreign Service personnel can use the exclusion if they have lived in a home for two of the last 10 years.

This change is retroactive to May 1997 -- when the home-exclusion rules went into effect -- and active-duty service members who paid taxes on home sales because they failed the original residence test can now claim refunds.

But time is short. Typically, taxpayers can’t claim refunds more than three years after their returns were filed. But the new law specifically gives military personnel one year from the date of the law’s enactment -- until next Nov. 11 -- to claim refunds, even if they are amending returns filed more than three years ago.

* Homeowner assistance payments are now tax-free. These payments are made by the Department of Defense to military homeowners when a base closing or reduction in operations causes a severe decline in home values in the area.

The program is aimed at helping military families recover the cost of having to sell their homes in an artificially depressed market, Luscombe said. This is one of the few provisions of the military tax relief law that are not retroactive. It went into effect when the law was signed last week.

* Military child-care assistance is now tax-free, retroactive to Jan. 1.

* Combat zone filing rules, which give personnel additional time to file and pay federal income taxes, have been expanded.

These rules give personnel stationed in the more than two dozen presidentially designated combat zones, as well as troops deployed in “contingency operations,” the ability to delay filing their taxes for as many as 180 days after their return to the United States. All tax penalties and interest charges also are put on hold.

In addition to members of the armed forces, the new law extends the combat filing rules to members of the merchant marine, the Red Cross, accredited journalists and civilians “engaged in support activities,” CCH said.

Although those who qualify do not need to file anything, if the taxpayer or his or her spouse mails a blank return to the IRS and writes “combat zone” across it, that may head off late notices that would be auto- matically generated otherwise, Luscombe said.

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy .kristof@latimes.com. For past Personal Finance columns, visit The Times’ Web site at www.latimes.com/perfin.