Senators want tax relief for troops

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http://www.armytimes.com/news/2007/06/military_taxrelief_070613w/
Senators want tax relief for troops


By Rick Maze - Staff writer
Posted : Wednesday Jun 13, 2007 12:10:18 EDT
A bill providing some tax relief to service members, their families and
employers was introduced Tuesday by the Democratic chairman and senior
Republican on the Senate Finance Committee.

Called the Defenders of Freedom Tax Relief Act, the bill includes $550
million in tax breaks for service members, veterans and the employers
of mobilized National Guard and reserve members.

The chief sponsors are Sen. Max Baucus, D-Mont., and Sen. Charles
Grassley, R-Iowa, but the bill includes provisions first proposed by others.

“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,” Baucus
said.

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

The bill tackles a variety of issues:

• It would make permanent a temporary tax provision allowing pay
earned in a combat zone, which is not subject to income tax, to still be
counted as income solely for the purpose of qualifying for the Earned
Income Tax Credit. If troops cannot count untaxed income for that purpose,
many would show no taxable income and thus would not qualify for the
earned-income credit.

• For survivors, the bill allows the $100,000 death gratuity paid for
an active-duty death to be put into an Individual Retirement Account or
other tax-deferred retirement plan. The change would encourage
survivors to save the money for old age.

• For military retirees who wait a year or longer to have veterans’
disability claims resolved, payments often are retroactive. The bill
would make it easier for those with retroactive payments to claim a tax
refund, which they would receive because some of their past retired pay
would then become tax-free. Current law limits tax refunds to three
years from the date of filing a tax claim, which ends up hurting some
disabled veterans who, through no fault of their own, have waited far
longer than three years to get their benefits. The bill would extend the
statute of limitations to one year after a VA disability decision is made.

• When civilian employers make up the difference between civilian pay
and military pay of mobilized National Guard and reserve members, the
Internal Revenue Service requires special reporting for the differential
pay that creates a burden for employers and employees. The bill would
allow them to use the normal W-2 form to report income for differential
payments and would treat the money as normal wages.

• Small businesses with fewer than 50 employees would get a tax
credit for making up the salary of reserve component employees who are
called to active duty. The tax credit would be equal to 20 percent of the
differential pay, with a cap of $20,000 a year.

• Guard and reserve members called to active-duty for at least 179
days would be able to make penalty-free withdrawals from tax-deferred
retirement plans. Current law imposes a 10 percent early withdrawal
penalty for withdrawals made before age 59½.

• For three years, qualified mortgage bonds — used by some states
to help veterans buy homes — would be available to veterans who are
first-time homebuyers. The bond authority is set to expire at the end of
the calendar year.

With Baucus and Grassley sponsoring the bill, it is almost certain to
pass the Senate Finance Committee. But the measure could also be
attached to another bill, such as to either the 2008 defense authorization
bill or to a separate Senate bill to expand benefits for wounded combat
veterans.