Senators Introduce Military Tax Relief Package

by Mike Godfrey, Tax-News.com, Washington

14 June 2007

Legislation has been introduced in the US Senate to provide significant tax cuts for American troops and their families.

The Defenders of Freedom Tax Relief Act aims to help members of the military when they receive combat pay, save for retirement, or purchase their own homes. The bill also includes tax help for employers of military reservists and for members of the National Guard who provide assistance to employees who are called to active duty.

The bill was introduced by Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa), Chairman and Ranking Republican Member of the Senate Finance Committee, along with a dozen other Senators.

“I introduced this legislation out of deep respect for our nation’s military. This bill honors and values the sacrifices that the men and women of the armed services make for our country every single day,” said Baucus. “This legislation puts dollars in the pockets of soldiers and veterans, and gets rid of unnecessary tax restrictions for military families who have more important things to worry about than red tape. There are often no words to express our thanks, but it is my hope this bill will show our troops that we recognize their contributions to our freedom.”

Grassley added: “Military service makes taxes complicated and sometimes unfair. People shouldn’t suffer a tax hit to serve our country. We need to make sure military men and women have fair treatment under the tax code. It’s a no-brainer.”

The Senators’ bill includes more than $550 million in tax relief for veterans, soldiers and their employers. Provisions in the legislation will:

• Make permanent a provision that allows soldiers to count their non-taxable combat pay when figuring their eligibility for the earned income tax credit, a refundable federal income tax credit that puts cash in the hands of low-income working individuals and families.
• Allow all veterans — not just first-time homebuyers — to use qualified mortgage bonds to purchase their homes.
• Cut taxes for small businesses when they continue paying some salary to members of the National Guard and Reserve who are called to duty.
• Eliminates cumbersome rules for reporting of income when companies continue paying some salary to members of the National Guard and Reserve who are called to duty. This makes it easier for reservists to file their taxes and simpler for employers to keep contributing to those employees’ retirement plans.
• Allow the families of soldiers killed in the line of duty to contribute up to 100% of survivor benefits to a retirement savings account.
• Allow active duty troops to withdraw money from retirement plans and give them two years to replace the funds without tax penalty.
• Extend a provision that gives retired veterans more time to claim a tax refund on some types of disability benefit payments.
• Make permanent a provision that gives intelligence service employees a longer period of time to meet residency requirements necessary to exclude profits from the sale of their home from capital gains tax, which is often necessary due to frequent deployment.
• Give the IRS the authority to treat gifts of thanks from states to veterans — such as payments of excess state revenue — as nontaxable gifts.

The bill is paid for with two offsets. The first makes 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 second extends a provision that allows the Social Security Administration to share earnings information so that accurate amounts of pension, dependency and indemnity compensation, hospice care, or unemployment compensation is paid to veterans and their families.

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