Military Family Tax Relief Act of 2003
Released: 2003-11-28T00:00:00

RS21683 -- Military Family Tax Relief Act of 2003

November 28, 2003

Measures Providing Tax Relief to Members of the Military

Expanded eligibility to exclude gain from the sale of a principal residence (sec. 101). Under section 121 of the Internal Revenue Code (IRC), an eligible taxpayer may exclude fromgross incomeup to $250,000 ($500,000 if married filing jointly) of the gain realized from the sale of his or her principal residence. One eligibilityrequirement is that the taxpayer must have used the property as a principal residence for at least two of the five yearspreceding thedate of sale. The Act amends section 121 so that a taxpayer may elect to suspend the five-year period for up to tenyears during thetime that the taxpayer or the taxpayer's spouse is on qualified official extended duty. (1) Qualified duty is serving for more than 90days or an indefinite period at a duty station that is at least 50 miles from the residence or while residing underorders in Governmentquarters. The new rule applies to sales and exchanges made after May 6, 1997. Since taxpayers are generally unableto amendreturns more than three years after the original filing date or two years after the tax was paid, (2) the Act grants taxpayers one year tofile for a refund even though it may otherwise be barred. The one-year period began on November 11, 2003.

Exclusion of the military death benefit from gross income (sec. 102). Under IRC� 134, qualified military benefits are excluded from gross income. The exclusion is limited to benefits that (1) aremade on accountof the taxpayer's status or service as a member of the Armed Forces and (2) were excusable on September 9, 1986. Any benefitincrease after September 9, 1986 is included in income, unless it is a cost-of-living adjustment or similar increase. The death gratuitypayment made to the survivors of members of the Armed Forces who die while on active duty is a qualified militarybenefit. (3) Thepayment was $3,000 on September 9, 1986 and it was later increased to $6,000. Thus, prior to the Act, the $3,000increase wasincluded in income.

The Act makes two changes related to the death gratuity payment. First, the benefit is increased from $6,000 to $12,000. Second,the entire payment, including any future increases, is excluded from gross income. The changes apply for all deathsoccurring afterSeptember 10, 2001.

Exclusion of payments made to offset the negative effect of base closure on housing values (sec.103). Under the Homeowners Assistance Program found in 42 U.S.C. � 3374, the Department of Defensemay offerpayments to members of the Armed Forces whose housing values have decreased due to military base realignmentor closure. Priorto the Act, such payments did not qualify for exclusion from gross income. The Act amends IRC � 132 so thatpayments made afterNovember 11, 2003 are nontaxable fringe benefits, subject to limitation by 42 U.S.C. � 3374(c).

Expanded eligibility for tax-related deadline extensions (sec. 104). Under IRC �7508(a), individuals serving in a Presidentially-declared combat zone are allowed extra time to complete a varietyof tax-relatedactivities, including filing returns and paying taxes. The Act expands the group of taxpayers eligible for theextensions to individualsserving in a contingency operation as determined under 10 U.S.C. � 101(a)(13). Examples of contingency operationsincludeoperations where members of the Armed Forces are or may become involved in hostilities against a foreign enemyand operationsduring national emergencies that require the call up of members of the Armed Forces. The new rule applies for anyperiod forperforming an act that did not expire before November 11, 2003.

Expanded eligibility for tax-exempt status for military organizations (sec. 105). Under IRC � 501, military organizations may qualify for tax-exempt status if (1) at least 75% of the members arepast or presentmembers of the Armed Forces and (2) substantially all of the other members are cadets or spouses, widows, orwidowers of past orpresent members of the Armed Forces or of cadets. The Act eases the "substantially all" requirement by allowingancestors or linealdescendants of past or present members of the Armed Forces or of cadets to be included. The change applies totaxable years afterNovember 11, 2003.

Clarification of treatment of dependent care assistance programs (sec.106). Thetax treatment of payments made to members of the Armed Forces under dependent care assistance programs hasbeen unclear. TheAct amends IRC � 134 to make it clear that these payments are subject to exclusion as a qualified military benefit. Thus, if apayment meets the qualifications in section 134, it may be excluded from income. The change applies for taxableyears afterDecember 31, 2002.

Tax favored status for distributions to military academy attendees from education savings accounts(sec. 107). Under IRC � 530(d), a portion of a distribution made from a Coverdell education savingsaccount thatexceeds the taxpayer's educational expenses is included in gross income and penalized by an additional tax. TheAct exemptsdistributions made to attendees of military academies from the additional tax. The exemption is limited to theattendee's "advancededucation costs" that are described in 10 U.S.C. � 2005(e)(3). The change applies for taxable years after December31, 2002.

Deduction for overnight travel expenses of National Guard and Reserve members (sec.109). Prior to the Act, overnight travel expenses of National Guard and Reserve members weredeductible only bytaxpayers who itemized their deductions, subject to the limitation on miscellaneous itemized deductions. The Actcreates anabove-the-line deduction for these expenses. The expenses are limited to the general Federal per diem rate and mustbe incurredwhile the reservist is serving more than 100 miles from home. (4) The change applies to expenses paid or incurred after December 31,2002.

Other Measures

Suspension of tax-exempt status for terrorist organizations (sec. 108). The Actsuspends the tax-exempt status or the application for such status for any organization that is either (1) designateda terroristorganization by executive order or under authority found in the Immigration and Nationality Act, the InternationalEmergencyEconomic Powers Act, or the United Nations Participation Act or (2) designated by executive order as supportingterrorism orengaging in terrorist activity. No deduction is allowed for any contribution to the organization during thesuspension. Thesuspension lasts until the designation is rescinded under the authority by which it was made. No challenges to thesuspension,designation, or denial of a deduction are allowed in any proceeding concerning the tax liability of the organizationor anothertaxpayer. The new rules apply to all designations, whether made before, on or after November 11, 2003.

Tax relief for astronauts killed in the line of duty (sec. 110). The Act provides taxrelief to astronauts who die in the line of duty after December 31, 2002. (5) First, astronauts are not subject to the income tax in theyear of death and in earlier years beginning with the taxable year prior to that in which the mortal injury occurred. (6) If the taxliability for those years, disregarding the exemption, is less than $10,000, then the taxpayer is treated as having madea tax paymentin the final taxable year that is equal to $10,000 less the liability. Further, the Act excludes employee death benefitpayments fromthe astronaut's income (7) and applies reduced estatetax rates to the astronaut's estate. (8)

Extension of customs user fees (sec. 201). The authorization for the customs userfees found in 19 U.S.C. � 58c(j)(3) is extended from March 31, 2004 to March 1, 2005.