Military Tax Relief Package Has Sting In The Tail For Expats

by Mike Godfrey, Tax-News.com, Washington

19 June 2008

The signing into law of the Heroes Earnings Assistance and Relief Tax (HEART) Act into law by President Bush has been welcomed by lawmakers on both sides of the aisle in Congress, but for US expats and some government contractors, the law contains a sting in the tail.

The bill will provide more than USD1.2bn dollars in tax relief to those serving in the US armed services and others volunteering service on behalf of the United States, including Peace Corps volunteers and AmeriCorps volunteers. It also contains numerous tax breaks designed to make life easier for military veterans, particularly those with injuries and disabilities.

“I worked to get this bill to the President’s desk because tax relief for America’s military men and women is the right thing to do,” stated Senate Finance Committee Chairman Max Baucus (D - Mont.), commenting on Bush's signing of the legislation.

“This bill helps our fighting forces and our veterans purchase their own homes, save for their retirements, and put their kids through college. It helps businesses keep reservists on the payroll while they are overseas. This new law provides timely and appropriate tax relief to those who sacrifice for our freedom," he added.

“People shouldn’t suffer a tax hit to serve our country," concurred Chuck Grassley (R - Iowa), ranking member of the Finance Committee.

"We need to make sure military men and women have fair treatment under the tax code. It’s a no-brainer," he added.

Perhaps appropriately, the cost of military tax relief in the HEART Act is offset with the closure of tax loopholes for government contractors failing in their patriotic duty to pay US taxes, and with tougher tax provisions on individuals who renounce their US citizenship.

Under the first provision, inserted into the legislation by former Democratic presidential nominee John Kerry (D - Mass.) and the current Democratic presidential candidate Barack Obama (D - Ill.), defense contractors should no longer have the ability to sidestep their tax obligations by going offshore, no matter where in the world they employ workers.

This provision will require US employers doing federal contract work for the US government, and using foreign subsidiaries to compensate their US employees working abroad, to begin paying Social Security and Medicare taxes on behalf of these employees. The provision is designed to make sure that defense contractors in Iraq, Afghanistan and elsewhere meet their legal obligation to pay payroll taxes on behalf of the people who work for them.

“For the sake of transparency and fairness in our tax system, we cannot allow Federal contractors to set up shell corporations in tax shelters and shirk their responsibility to pay payroll taxes for their American employees," Obama commented following approval of the legislation by the House of Representatives on 21st May.

The other offset provision seeks to make certain that individuals who relinquish their US citizenship or long-term US residency pay the same Federal taxes for appreciation of assets, such as stocks or bonds that they would pay if they sold them as US citizens or residents.

The bill also increases the penalty for people who fail to file their tax returns and allows the Social Security Administration and the Veterans’ Administration to work together to verify low-income status when distributing veteran’s benefits.

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