Military Personnel Enjoy New Tax & Pension Benefits

The recently enacted “Heroes Earnings Assistance and Relief Tax Act of 2008” (the 2008 Heroes Act) contains a wide-ranging package of tax benefits for military personnel and veterans. Here’s an overview of some of the provisions:

• Stimulus Rebate – Makes an active duty military taxpayer who files a joint tax return eligible for the stimulus rebate payment even if his or her spouse does not have a Social Security number.

• Earned Income Tax Credit - Makes permanent the ability to include non-taxable combat pay as earned income for purposes of the earned income tax credit. Prior to this law change, this benefit was only available through 2007.

• Extended Tax Refund Filing Date - Extends the statute of limitations period for filing a tax refund for claims arising from retroactive disability determinations.

• Modified Rules Regarding Differential Pay – Beginning in 2009, differential pay (voluntary payments by employers to employees called to active duty) will be treated as compensation for retirement plan purposes and for purposes of the IRA contribution rules. In addition, differential wages will be subject to income tax withholding.

• Income Exclusion – State and Local Bonuses - Provides an exclusion from income for state or local payments of bonuses paid to active or former military personnel or their dependents on account of such military personnel's service in a combat zone.

• Flexible Spending Account Withdrawals - Allows members of the reserves who are called to active duty to withdraw unused amounts held in a health flexible spending account.

• Retirement Plan Protection - Requires tax-qualified retirement plans to treat a participant who dies or becomes disabled while performing qualified military service as if the individual was rehired the day before death or disability followed by employment termination on the date of death or disability. These changes apply to deaths or disabilities occurring after 2006.

• Penalty-Free Retirement Plan Withdrawals - Makes permanent the expiring provision that permits active duty reservists to make penalty-free withdrawals from retirement plans.

• Death Benefits and Insurance Proceeds Rollover - Permits a military death gratuity or amount received under the Service Members' Group Life Insurance (SGLI) program to be rolled over to a Roth IRA or Coverdell education savings account, notwithstanding the contribution limits that otherwise apply.

Please keep in mind that this is only an overview of the changes established by the new law. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.

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