The Tax Prophet - Hot Topics October, 2003

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		Tax Relief for Military Families

Introduction		On November 11, 2003, the President signed the Military Family Tax Relief Act of 2003 (MFTRA), providing those serving in combat and others in situations of national consequence a variety of tax-relief provisions.
Tax-Free Reimbursements		When military personnel sell their homes at a loss due to a base closure or substantial reduction in operations at a military base, the government reimburses the home seller for a portion of the loss, generally 75% of the fair market value of the home prior to the closure (or substantial reduction in operations). Under MFTRA, the reimbursement is tax-free to the home owner up to the reduction in fair market value. For example, if the reduction in fair market value is $50,000 but the reimbursement is $60,000, then $50,000 is excluded from income.
Expansion of Educational Account Distributions		An Educational Savings Account or Section 529 plan distribution may now occur, without penalty, when the recipient receives appointment to the U.S. Navy, Coast Guard, Air Force, or Merchant Marine Academy. Under prior law, a 10% penalty applied since appointments were not considered "scholarships" and the exception to the penalty only involved scholarships. The effective date for this provision begins in 2003.
Suspension of Filing Requirements		Taxpayers serving in combat zones are excused from complying with a variety of tax-related deadlines (including tax filing and payments). The extension applies during the time the taxpayer is in a combat zone, plus 180 days thereafter. MFTRA expands the extension rules to those involved in contingency operations - those operations involving military actions or hostilities against an enemy of the U.S. -- as designated by the Secretary of Defense or declarations of a national emergency by the President or Congress. The new suspension rules apply to military personnel located inside a combat zone (and those who support activities in a combat zone), Merchant Marines, Red Cross personnel, accredited correspondents, and civilian personnel engaged in support activities (i.e. those working for Halburton or similar companies). The new suspension rules apply only to deadlines that occur while the taxpayer meets these combat zone requirements. The exception also applies to spouses of those within a combat zone.
Expanded Travel Deduction		National Guard members and reservists many now deduct travel expenses as an above-the-line deduction (i.e. in addition to the standard deduction or itemized deductions claimed on Schedule A of Form 1040). Travel must be at least 100 miles away from home and must include an overnight stay. The deduction is limited to the federal per diem rate applicable in the locality where the taxpayer lives. This benefit applies to expenses incurred after December 31, 2002. Under prior law, travel expenses had to be claimed as an itemized miscellaneous deduction on Schedule A of Form 1040.
Expansion of the Residency Exclusion		The residency exclusion provides up to a $250,000 exclusion in profits ($500,000 for joint files) on the sale of a principal residence, as long as the taxpayer owned and lived in the residence for at least 24 of the 60-month period prior to sale. Thus, if a taxpayer lived in a home for 24 months, a later sale of the home up to 36 months later would qualify for the exclusion. MFTRA expands the 5-year limitation for military and foreign service personnel on qualified official extended duty away from home by allowing a suspension of up to 10 years for a designated residence. The duty station must be at least 50 miles away from the residence (or the taxpayer must be ordered to reside in government quarters) for at least 90 days or an indefinite time period. The suspension rules apply to military, National Oceanic and Atmospheric Administration, Public Health Service and Foreign Service personnel. The suspension is retroactive to May 6, 1997 (the date when the residency exclusion was enacted) and eligible taxpayers have a minimum of 12 months to claim any refunds by filing an amended return (Form 1040X). Note: A partial exclusion applies if a taxpayer owned a home for less than 24 months but had to sell it because of "unforeseeable circumstances" which includes terrorist attacks and military reassignments. For instance, if a single person sold a home after 12 months due to a military reassignment, the exclusion would be reduced to $125,000 (50% of $250,000).
Miscellaneous Provisions		Families of Astronauts who die while performing their duties may exclude income taxes and receive death benefits as well. These same benefits are provided to victims of terrorism. Veteran's organizations need to meet membership requirements to maintain their tax exempt status. Under MFTRA, ancestors and lineal descendants of military veterans are counted as veterans. Finally, charities designated as terrorist organizations lose their tax-exempt status and contributions to such entities will not receive a deduction.

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