No Social Security Number Is Required for Military Families to Receive a Tax Rebate. The rebates provided by the Economic Stimulus Act of 2008 are generally not provided to a taxpayer who doesn't have a Social Security number (SSN). However, the Heroes Tax Act creates an exception for joint-filing married couples if at least one spouse is a member of the Armed Forces (regular or reserve) at any time during the year. In this case, the SSN requirement is waived, which means the couple can qualify for a rebate even if neither
|
|
|
Other Changes in the Law
The Heroes Tax Act also has other tax changes, including:
- Military death gratuity payments and amounts received under the Service members' Group Life Insurance Program can be rolled over into the recipient's Roth IRA or Coverdell Education Savings Account without regard to the contribution limits that would otherwise apply.
- Military reservists are given extra time to take withdrawals from cafeteria benefit plan healthcare flexible spending arrangements (FSAs). Under the "use-it-or-lose-it" rule, reimbursable healthcare expenses must be incurred by no later than 2 1/2 months after the end of the plan year (or by the end of the plan year if the plan doesn't allow a grace period). Any remaining FSA balance is forfeited to the employer. Reservists can now avoid the use-it-or-lose-it rule.
- The new law gives veterans a longer period of time to claim tax refunds for previously taxed veterans' benefits--based on later determinations that service-related disabilities exist. (Veterans' benefits paid for service-related disabilities are federal-income-tax-free).
- For purposes of passing the ownership and use tests to qualify for the home sale gain exclusion privilege, the normal five-year period ending on the sale date is suspended for certain absences while volunteering in the Peace Corps. The five-year period is also suspended for members of the intelligence community who serve for extended periods of duty.
- The new law imposes domestic employer status on certain domestically controlled foreign entities (basically, offshore shell companies). The purpose is to cause compensation for services performed by employees of these entities, pursuant certain U.S. government contracts, to be subject to FICA tax.
|
spouse has a number (assuming the other eligibility rules are met).
Key Point: The SSN waiver is only available to married joint filers.
The Election to Treat Tax-Free Combat Pay as Earned Income Is Made Permanent. Military personnel can elect to treat federal-income-tax-free combat pay as earned income for purposes of claiming the earned income tax credit (EIC). Making the election is done by simply including the tax-free combat pay in earned income when calculating the EIC. The provision allowing this election had expired at the end of 2007. The Heroes Tax Act reinstated it and made it permanent.
Key Point: Making this election has no impact on taxable income. In other words, combat pay is still free from federal income tax when the election is made. Making it simply allows the taxpayer a bigger EIC.
Enhanced Retirement Plan Benefits Are Provided to Survivors. The Heroes Tax Act requires retirement plans to provide enhanced benefits to survivors of plan participants who die while performing qualified military services.
The new law also permits retirement plans to voluntarily provide enhanced benefits for participants who leave employment for qualified military service and cannot be re-employed due to death or disability.
Both of these retroactive provisions apply to deaths or disabilities occurring after 2006.
There Are New Rules for Differential Pay. Some employers voluntarily pay employees serving in the military (typically reservists) all or part of the wages they would have earned during their periods of service. These amounts are called differential pay. The Heroes Tax Act specifies that differential pay paid after 2008 is subject to federal income withholding. Also, for tax years beginning after 2008, differential pay must be counted as compensation under for employer retirement plan contribution limitation purposes and it counts as compensation for IRA contribution eligibility purposes.
Key Point: These changes impose new requirements on employers and may actually discourage some companies from providing differential pay. However, the new tax credit explained next will help eligible employers.
A New (Temporary) Differential Pay Credit is Created for Small Employers. The Heroes Tax Act creates a new tax credit for eligible small employers that provide differential pay to employees while they serve in the military. The credit equals 20 percent of differential pay of up to $20,000 paid to each qualifying employee during the tax year. However, the credit is only available for payments made after June 17, 2008 and before 2010. Only employers that average less than 50 employees during the tax year and provide differential pay to each qualified employee under a written plan can qualify for the credit.
The employer's deduction for wage expense must be reduced by the amount of the credit, and any other-wage based credits must also be reduced by the amount of the credit. The credit is not allowed against the AMT.
There's a New Income Exclusion for State and Local Bonus Payments . The new law retroactively excludes from gross income bonus payments made by states or political subdivisions to any member or former member of the U.S. uniformed services (or their dependents). However to qualify for the exclusion, the bonus payment must be made only because of service in a combat zone.
Key Point: Individuals who paid federal income taxes on such bonus payments in open prior years have an opportunity to file amended returns and collect federal income tax refunds.
A Favorable Exception for Early Retirement Account Distributions Is Made Permanent. The Pension Protection Act of 2006 opened up a new exception to the 10 percent premature withdrawal penalty tax which generally applies to pre-age-59 1/2 distributions from tax-favored retirement arrangements. The Heroes Tax Act makes that exception permanent.
The exception is for "qualified reservist distributions" which are defined as early payouts taken from an IRA or from elective deferral (salary reduction) contributions to a 401(k) plan, a 403(b) tax-sheltered annuity plan, or a similar arrangement. Qualified distributions must be received by a person who, because of status as a member of a military reserve component, was ordered or called to active duty after September 11, 2001 for a period of more than 179 days or for an indefinite period. Also, qualified distributions must occur during the period that begins on the date of the order or call to duty and ends when the active duty concludes.
Before this exception was made permanent, it was only allowed to reservists called to active duty before December 31, 2007. Thanks to the Heroes Tax Act, that deadline no longer applies.
New Clarification Regarding Income Exclusion for Volunteer Firefighters and Emergency Responders. The Mortgage Forgiveness and Debt Relief Act of 2007 created a temporary and limited exclusion from gross income for members of qualified volunteer emergency response organizations. The limited exclusion applies to qualified state or local tax benefits and qualified payments received by these individuals in 2008 through 2010. The Heroes Tax Act retroactively clarifies that amounts excluded from gross income under this provision are not subject to federal income tax withholding or federal employment taxes.
Minimum Failure-to-File Penalty
Is Increased. The Heroes Tax Act increases the minimum penalty for failing to file an individual or C corporation federal income tax return within 60 days of the due date to the lesser of:
This change is effective for returns required to be filed after 2008 (in other words, calendar-year 2008 returns for calendar-year taxpayers).
Key Point: This provision only changes the minimum failure-to-file penalty. As before, the maximum failure-to-file penalty is 25 percent of the amount of tax required to be shown on the return. If no return is filed, this maximum penalty accrues at the rate of 5 percent per month for up to five months (5 times 5 percent equals 25 percent).
An Exit Tax or "Toll Charge" Is Imposed on Expatiates. The Heroes Tax Act sets forth complex new rules for the tax treatment of high-income individuals who relinquish U.S. citizenship or residency to avoid U.S. taxation. Specifically, the law:
- Treats all property of expatriates as sold for fair market value on the day before the expatriation date and includes gain (over $600,000) or loss from the sale in their gross incomes.
- Allows expatriates to elect to defer payment of any tax resulting from expatriation if adequate security for payment of such tax is given.
- Requires 30 percent withholding of tax for certain items of deferred compensation payable to expatriates.
- Imposes a separate tax on gifts and bequests from expatriates exceeding $10,000, payable by the recipient of the gift or bequest, at the highest federal gift tax rate.
Full Newsletter
