Salute to Our Armed Forces

The holiday commemorating Independence Day falls on a Monday this year. On this day, there are always an infinite number of possible places to go, things to do, people to see, great food to eat, baseball games to watch, and fireworks to cheer over. Above all else, the 4^th of July is a birthday. It is a day to celebrate our nation’s birth, the American way of life and to give thanks for the many blessings of living in these United States; the land of the free and the home of the brave.

All of us owe a great deal to the women and men of the military who have helped guarantee that we remain “the Land of the Free and the Home of the Brave”. The PRO-TAX family is pleased to help remind all about the importance of recognizing our neighbors, our brothers and our sisters who are serving us in the military.

There are some special tax-related considerations for armed service personnel, especially related to the Uniformed Services Employment and Reemployment Rights Act (USERRA) and the Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act). These laws grant a number of benefit rights to employees on or returning from military leave. PRO-TAX wants to help make sure all those concerned are aware of these provisions.

We wish to point out to business owners not only the requirements of these Acts, but also the credit  to  eligible small business employers that make eligible differential wage payments to qualified employees who are on active duty in the uniformed services for more than 30 days. An eligible small business employer may take a credit against its income tax liability in an amount equal to 20 percent of the sum of the eligible differential wage.

The benefits are quite involved but here is a brief summary. We will also provide Internet links so that you may get further details.

• Generally, an employee who leaves a civilian job for qualified military service is entitled to be reemployed by the pre-service civilian employer if the individual returns to employment within a specified period and meets the other eligibility criteria under USERRA. The act also provides that an individual, upon reemployment, is entitled to receive certain pension, profit-sharing, and similar benefits that would have been received but for the employee’s absence during military service.
• Certain members of the uniformed services are automatically entitled to life insurance under the Servicemembers’ Group Life Insurance (SGLI) program. In general, life insurance proceeds are also excludable from income.
• Some provisions directly affect employee benefit plans sponsored by the employer. The HEART Act applies to qualified retirement plans, 403(b) plans, and 457(b) plans. If a participant dies while performing qualified military service, the survivors are entitled to receive any additional benefits (other than benefit accruals relating to the period while on military leave) provided under the plan as if the participant had resumed employment on the day before death.
• An employee reemployed under USERRA is treated as not having incurred a break in service because of the period of military service. The employee’s military service is treated as service with the employer for vesting and benefit accrual purposes and the employee is permitted to make additional elective deferrals and employee contributions.  The employee is entitled to any accrued benefits that are contingent on employee contributions or elective deferral to the extent the employee pays the contributions or elective deferrals to the plan.
• Qualified retirement plans must provide that, in the case of a participant who dies while performing qualified military service; the survivors of the participant are entitled to any additional benefits that would have been provided under the plan had the participant resumed employment and then terminated employment on account of death.  This tax qualification requirement also applies to tax-deferred annuities under § 403(b) of the Code and to governmental eligible deferred compensation plans under § 457(b).
• Under current law, a taxpayer who receives a distribution from a qualified retirement plan prior to age 59¹/₂, death, or disability is generally subject to a 10-percent additional income tax under § 72(t) unless an exception applies. Amendments made by the Pension Protection Act of 2006 provide that the 10-percent additional income tax does not apply to a distribution to a qualified reservist.
• Earned Income Credit: The taxpayer may choose to treat combat pay that is otherwise excluded from gross income as earned income for purposes of the Earned Income Credit
• Exclude many items which may appear to be income taxable but are not for qualified military personnel.  These are listed in some detail in IRS Publication 3. Items such as Basic Allowance for Housing and Basic Allowance for Subsistence, Overseas Housing Allowance ,Combat Zone Pay  and, for example family allowances for emergencies
• Travel by Armed Forces Reservists, if unreimbursed, can be a deduction on the 1040 as an adjustement to income without having to meet an “itemized” deduction (Schedule A).

In Summary

The Armed Forces Tax Guide, IRS Pub 3  , has a great deal of very useful information to help Armed Forces men and women with tax matters.  In addition, there is a Taxpayer Advocate Service which might also be helpful.  Your local PRO-TAX office can help military personnel and their dependents.  Contact PRO-TAX at 1-800-809-2829, or click here for a guide to our locations.

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