A column on personal finance prepared by the Virginia Society of Certified Public Accountants


March 18, 2004) – The Military Family Tax Relief Act of 2003, signed into law by President George Bush on Veterans Day, 2003 provides active members of the U.S. Armed Forces, including those serving in combat zones, with special tax breaks. According to the Virginia Society of CPAs, the effective dates for relief vary and some of the provisions are retroactive requiring amended returns. Here’s information that can help military personnel and their families claim what they deserve in 2003 and 2004.

Extension of Combat Zone Filing Rules

Prior to the enactment of the 2003 Military Relief Act, several deadlines, such as those for filing tax returns and making tax payments, were extended for certain individuals serving in a combat zone. The extension for filing and paying taxes for these individuals is 180 days after the last day in the combat zone. The new act extends eligibility for this tax break to those serving in contingency operations as defined by the Secretary of Defense.

National Guard and Reserve Travel

Members of the National Guard and Reserve often incur travel expenses to attend meetings or drills, and not all of their expenses are reimbursed. Under the new act, reservists who stay overnight while in service more than 100 miles from home may deduct from gross income unreimbursed travel expenses, including meals, lodging, and transportation. Under the old law, such expenses were deductible only as an itemized deduction on Schedule A, subject to the 2 percent of adjusted gross income limitation. Now, you can claim this deduction even if you don’t itemize.

Home Sale Capital Gain Tax Exclusion

Recognizing that serving in the military can result in relocations and home sales, Uncle Sam provides some additional tax breaks. All taxpayers may exclude up to $250,000 ($500,000 if filing jointly) of gain from the sale of their residence if the property was used as the taxpayer’s principal residence for two or more years during a five-year period ending on the date of sale. The new act eases this time requirement for soldiers deployed away from home. Under the Military Act, uniform and foreign services personnel serving on qualified official extended duty may elect to suspend for up to 10 years of such duty time the running of the five-year test period. The maximum length of the suspension is 10 years.

This special election is retroactive to sales made after May 6, 1997. If you were required to pay taxes because of the holding period rules, you may file an amended return to reclaim the taxes paid. Qualified persons who sold a residence prior to 2001 have until November 10, 2004 to amend their returns for this purpose.

Homeowner’s Assistance Program

Under the Homeowner’s Assistance Program (HAP), the Department of Defense makes payments to compensate qualifying uniformed service members for a drop in home value resulting from military base closures and realignments. Under the new act, payments received after November 11, 2003 are excluded from income and treated as a tax-free fringe benefit.

Death Benefit and Taxation

The Military Tax Act doubles the military death benefit from $6,000 to $12,000, retroactive to September 11, 2001. Under the new law, the entire amount of the benefit is tax-free. Previously, only $3,000 of the $6,000 total benefit was not taxed. Families who received payments for deaths that occurred after Sept 10, 2001 and before 2003 can amend their tax returns to remove the $3,000 of taxable income.

Military Academy Penalty Waivers

Education-related tax breaks are available to qualified military personnel as well. Under the new act, the 10 percent penalty tax on payments from qualified tuition plans or Coverdell Education Accounts that are not used for qualified educational expenses does not apply to attendees of the U.S. Military, Naval, Air Force, Coast Guard, or Merchant Marine Academies. This penalty waiver is effective for 2003 and subsequent years.

Dependent Care Assistance Programs

The tax act clarifies that, for tax years after 2002, dependent care assistance programs for military personnel are excludable from gross income.

IRS Web Site for Military Personnel

The IRS has added a special section to its Web site to explain the benefits and services available to those serving in the U.S. Armed Forces. If you have additional questions, consult with a CPA.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at

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