RICHMOND, Va.(Army News Service, Feb. 6, 2004) — The Internal Revenue Service is helping taxpayers use a new law that adds deductions for some reservists, expands the definition of combat zone, and provides income exclusions for military death-benefit payments and certain home sales.

President Bush signed into law the Military Family Tax Relief Act of 2003 on Nov. 11 with retroactive provisions making it beneficial for some Soldiers to file amended returns on form 1040X.

“The IRS asks them to put the words “Military Family Tax Relief Act” in red at the top of such (amended) returns to speed processing,” said IRS spokeswoman Gloria Wajciechowski.

The new law doubled the benefit paid to survivors of deceased Armed Forces members to $12,000, made the entire amount tax-free and made the changes effective for deaths occurring after Sept. 10, 2001. Previously, only $3,000 was tax-free.

“Recipients who already paid tax on benefits received for deaths after the effective date may file an amended return on Form 1040X, reducing their adjusted gross income by the $3,000 they had reported as taxable,” Wajciechowski said. “Those who receive such “gratuity” benefits in 2003 and future years will not have to report them on their tax returns.”

Taxpayers may exclude gain on a home sale, provided they have owned and used the home as a principal residence for two of the five years before the sale. A reduced maximum exclusion may apply to those who satisfy part of the two-year rule. Military personnel often retain ownership of a home while away on duty, but eventually sell it without returning to live in it, perhaps failing the use test completely, IRS officials said.

The new law allows persons on qualified extended duty in the U.S. Armed Services or the Foreign Service to suspend this five-year test period for up to 10 years of such duty time. A taxpayer is on qualified extended duty when at a duty station that is at least 50 miles from the residence sold, or when residing under orders in government housing, for more than 90 days or for an indefinite period.

This change applies to home sales after May 6, 1997. A taxpayer may use this provision for only one property at a time and may exclude gain on only one home sale in any two-year period. Although an amended return must usually be filed within three years of the original return’s due date, the law gives qualifying taxpayers who sold a home before 2001 until Nov. 10, 2004, to file an amended return claiming the exclusion.

Also under the new law, National Guard and Army Reserve members who stay overnight more than 100 miles away from home for a drill or meeting may deduct unreimbursed travel expenses (transportation, meals and lodging) as an above-the-line deduction. The deduction is limited to the rates for such expenses authorized for federal employees, including per diem in lieu of subsistence. This provision is effective for tax years after 2002.

For 2003 returns, IRS officials said taxpayers should use Form 2106 or 2106-EZ to figure the deduction amount and carry it as a “write-in” to Form 1040, line 33, putting the letters “RC” and the amount on the dotted line and include this subtraction in the entry for line 33.

Under another provision, payments made after Nov. 11, 2003, under the Department of Defense Homeowners Assistance Program, to offset the adverse effects on housing values of military base realignments or closures, will be excludable from income as a fringe benefit.

In addition, the definition of “combat zone” was expanded under the new law to include contingency operations. The various extensions granted to combat-zone participants to hold off on filing returns or paying taxes until after they return will also apply to those serving in contingency operations, as designated by the Secretary of Defense, IRS officials said.

Soldiers who think they may need to file an amendment to benefit from the new law, but cannot find a copy of their tax return for a previous year, may use Form 4506, “Request for Copy or Transcript of Return,” to get an earlier year’s tax return, Wajciechowski said. This form and Form 1040X are available on the IRS Web site at www.irs.gov, or by calling 1-800-TAX–FORM (1-800-829-3676).

(Editor's note: Information provided by IRS Public Affairs.)