MILITARY UPDATE
House, Senate to smooth out tax break legislation
Military Update focuses on issues affecting pay, benefits and lifestyle of active and retired servicepeople. Its author, Tom Philpott, is a Virginia-based syndicated columnist and freelance writer. He has covered military issues for almost 25 years, including six years as editor of Navy Times. For 17 years he worked as a writer and senior editor for Army Times Publishing Co. Philpott, 49, enlisted in the U.S. Coast Guard in 1973 and served as an information officer from 1974-77.
By Tom Philpott
The Senate is expected to follow the House's lead in passing legislation that would give service members and Foreign Service officers the same tax breaks on profits from home sales as other U.S. homeowners enjoy.
But the Senate version of the Armed Forces Tax Fairness Act of 2002 has even more initiatives to help service people, including tax exclusions on travel expenses for reservists and National Guard members.
With the provision to restore tax equity on "gains from the sale of principal residence" in both bills, passage is virtually assured this fall.
The travel-expense exclusion for reservists is five times as costly, in terms of lost tax revenue, so it faces an uncertain fate when a House-Senate conference committee meets to smooth out differences in the two bills.
Almost 350,000 service members, or roughly 20 percent of the active force, are homebuyers. Under the Tax Reform Act of 1997, they and Foreign Service officers are at a disadvantage when forced to live overseas or away from permanent residences for long periods.
The '97 law says individuals can shield from taxes up to $250,000 in capital gains — $500,000 for couples filing jointly — on home sales. But to qualify, a taxpayer must have "owned and used" the property at least two of the last five years before the property was sold. No exceptions are allowed.
Lawmakers concede they should have included exceptions to the five-year formula for military and Foreign Service homeowners. After a couple of false starts in recent years to correct the problem, the House passed HR 5063, the Armed Services Tax Fairness Act, on July 9. Rep. Amory Houghton, R-N.Y., the lead sponsor, is a World War II-era Marine.
The House bill would allow military and Foreign Service homeowners to suspend the five-year rule for protecting capital gains from home sales for up to 10 years if and when job assignments keep them away from their homes.
"Qualifying extended duty" under the change would be any period during which members, under orders, serve at least 50 miles from a principal residence or are forced to live in furnished government quarters. Suspension of the five-year rule would apply to home sales after the bill is signed.
The House bill also would change the tax code to recognize a recent doubling of the military death gratuity, to $6,000. Present law allows only $3,000 of the gratuity to be excluded from taxable gross income.
The Senate version of HR 5063 cleared the Senate Finance Committee Sept. 12 with both House provisions, so final passage is quite likely. But the Senate bill endorses added tax breaks that, if approved by the full Congress, would lower service members' tax bills an extra $840 million through 2012.
Here are details on what so far are Senate-only initiatives:
• Tax-free overnight travel expenses of Reserve and National Guard.
Reservists when mobilized or going to weekend drills can face travel, lodging and food expenses. Under present law, those expenses can be counted as itemized deductions if they exceed 2 percent of adjusted gross income. The Senate bill would have the IRS treat Reserve travel expenses as "above the line" deductions from gross income, directly lowering their tax. The deductions per day cannot exceed the government's per diem rate. If approved, this change would start in tax year 2002.
• Tax-free HAP.
Under the military's Homeowners Assistance Program, the Defense Department reimburses service members for drops in home values tied to base closings and realignments. Such payments now are treated as taxable wages. The Senate bill would make HAP payments tax-free. The change would apply to HAP pay after the bill is signed.
The Senate bill also would expand combat zone tax filing rules for contingency operations and would clarify as "excludable" from income tax any childcare subsidies provided by employers to families of reservists.
Concurrent receipt
Two lawmakers leading efforts by Congress to lift the ban on concurrent receipt of both military retirement and VA disability pay urged service associations recently to keep pressure on the White House.
Rep. Michael Bilirakis, R-Fla., and Sen. Harry Reid, D-Nev., were cited for their leadership on this issue at a reception sponsored by The Military Coalition, an umbrella group of military associations. In accepting awards, both men said some type of victory on concurrent receipt is near but not assured.
House-Senate conferees are meeting this month to shape a final defense authorization bill. One key decision is whether to accept the Senate plan for full concurrent receipt, the House plan to restore lost retired pay in phases and only for the most seriously disabled, some alternative to both or just heed White House warnings of a veto and elect to kill both plans.
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