The “Military Family Tax Relief Act of 2003” became law on November 11, 2003, early in the current wars in Afghanistan and Iraq. The law provides certain tax benefits to service people and their families, including:
* Death benefits.
Prior to the change, the death gratuity paid to the survivors of deceased members of the Armed Forces was $6,000, of which $3,000 was subject to taxation and $3,000 was tax free. This is now $12,000, all of which is tax free. Further, it was made retroactive to all deaths on or after September 11, 2001. (Survivors had the usual three years to submit an amended tax return to claim the gratuity if the death occurred in a year for which they had already filed their taxes.)
* Definition of principal residence.
A “principal residence” is eligible for certain tax benefits that other property is not, and to be a “principal residence” typically requires that a person live in the home for at least two of the last five years. Obviously that can be an issue for service people who can be sent anywhere in the country or around the world for extended periods.
The law now provides that for up to ten years, a member of the Armed Forces or the Foreign Service is exempt from that requirement to live in the property. The taxpayer must be on duty at least 50 miles from the residence and/or be mandated to live in government housing for a period of more than 90 days or for a period that initially is indefinite.
This provision too was made retroactive, to May 6, 1997. The normal three year limit on filing amended tax returns was extended to allow eligible taxpayers to claim this benefit after the fact.
* Travel expenses.
National Guard and Reserve members who travel at least 100 miles and stay overnight at least one night as part of their service may now deduct unreimbursed transportation, meals, and lodging costs as an above-the-line deduction on their tax return. The deduction is calculated and capped as per the deduction for travel expenses for federal employees.
* Department of Defense Homeowners Assistance Program.
This pre-existing program provides benefits to offset the adverse effects on housing values of military base realignments or closures. The change is that whereas this was formerly classified as fringe benefit income, it is now excludable from that category.
* Expansion of combat zone extensions.
Combat zone participants are granted certain extensions in filing tax returns and paying taxes. These extensions now are also available to those serving in Contingency Operations, as designated by the Secretary of Defense.
* Dependent care assistance programs.
Correcting a previous ambiguity in the law, benefits received by members of the Armed Forces under dependent care assistance programs are now excludable from the category of fringe benefit income for tax purposes.
* Military academy expenses.
The 10% tax on payments from a Qualified Tuition Program or Coverdell Education Savings Account that are not used for educational expenses is waived for attendees of the U.S. Military, Naval, Air Force, Coast Guard, or Merchant Marine Academies, as long as such payments do not exceed the costs of advanced education.