Salute To Our Armed Forces

According to the United States Department of Defense website, “On August 31, 1949, Secretary of Defense Louis Johnson announced the creation of an Armed Forces Day to replace separate Army, Navy and Air Force Days. The single-day celebration stemmed from the unification of the Armed Forces under one department -- the Department of Defense.” 

This article is our way of showing honor to those proud and brave men and women who serve in our Armed Forces.  It addresses tax situations primarily for those members of the Armed Forces remaining with us, or those whom the fallen have left behind. 

Recently, President Bush signed into law the HEART Act (Heroes Earning Assistance and Relief Tax Act).   This Act does the following: 

• Permanently extends the availability of the election to treat combat pay that is otherwise excluded from gross income under section 112 as earned income for purposes of the Earned Income Credit. 
• Permanently extends the limited exception from the first-time homebuyer rule for veterans under the qualified mortgage bond program. 
• Modifies USERRA to allow the day prior to the date of a service person’s death to be treated as the date the employee returned to work.  This will trigger payment of benefits under any qualified retirement plans.  It makes permanent the special rules permitting penalty-free withdrawals from retirement plans, and permits employers to make certain contributions to a qualified pension plan on behalf of an employee who becomes disabled or is killed in combat. 
• Allows military death gratuity or SGLI payment to be contributed to a Roth IRA, or to one or more Coverdell education savings accounts (notwithstanding the contributions limits that otherwise apply, but not more than the sum of the gratuity and SGLI payments that the individual receives). 

The bill enacts more than just those items noted above.  For more detail, see the bill in its entirety.  Plus there are the deductions, credits and exemptions that have been in effect for some time. 

While many deductions, credits and exemptions are the same as for civilians, military personnel (and sometimes their spouses) do earn special treatment in some circumstances.  For more detail, see Pub 3 on the IRS website. 

Exclude the following from Income when filing your taxes (they should not be reported on your W2): 

• Basic Allowance for Housing (BAH)
• Basic Allowance for Subsistence (BAS)
• Housing and cost-of-living allowances abroad
• Overseas Housing Allowance (OHA)
• Combat Zone Pay (note, there is a limited amount for officers)
• Family allowances for emergencies, evacuation to a place of safety, separation and certain educational expenses for dependents
• Death allowances:  burial services, death gratuity payments to eligible survivors, travel of dependents to burial site
• Certain moving allowances (dislocation; military base realignment/closure benefit; move-in housing; moving household and personal items, trailers or mobile homes; storage; temporary lodging and associated expenses)
• Certain travel allowances (annual round trip for dependent students; leave between consecutive overseas tours; reassignment in a dependent restricted status; transportation for you or your dependents during ship overhaul or inactivation; per-diem)
• Professional dues: you can deduct dues paid to professional societies directly related to your military position (but not to an officers’ or non-commissioned officers' club)

And there’s more…

Housing.  If you receive a BAH (Basic Allowance for Housing), you can still deduct your mortgage interest and real estate taxes on your home – even if you paid them with your BAH.

Combat Zone Pay.  Besides active duty pay earned in any month you served in a combat zone, you can also exclude a reenlistment bonus if the voluntary extension/reenlistment occurs in a month you served in a combat zone and pay for accrued leave earned in any month served in a combat zone (determined by the Department of Defense).  And, if the entire year of service required to earn the repayment of a student loan was served in a combat zone, the entire repayment made because of that year is excluded.  This also applies for partial year combat zone repayment. 

The above rules can also apply to commissioned officers (other than commissioned warrant officers).  If you are a commissioned officer, you can exclude your pay according to the information above, but the amount of your exclusions is limited to the highest rate of enlisted pay for each month during any part of which you served in a combat zone. 

And on a sad note, there are also “benefits” at the death of one of our military personnel.  Tax liability can be forgiven if a member of the U.S. Armed Forces dies while in active service in a combat zone; from wounds, disease or other injury received in a combat zone; or from wounds or injury incurred in a terrorist or military action.  Tax for the year of death and possibly for earlier years can be forgiven.   

To claim this forgiveness, write on the top of the 1040, in bold, the name of the combat zone and KIA (example:  “Operation Enduring Freedom – KIA”).  Attach a completed Form 1310 (Statement of Person Claiming Refund due to a Deceased Taxpayer), and a certification from the Department of Defense or the Department of State.

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