Senate panel weighs military tax breaks, but delays vote

Just a few days before the first anniversary of the September 11 attacks, the Senate Finance last week considered a tax equity bill for members of the armed forces but failed to get quorum to vote on the measure.

The committee was expected to easily pass the chairman's mark of the Foreign and Armed Services Tax Fairness Act (H.R. 5063) but Chairman Max Bacus of Montana postponed the vote after the committee failed to round up enough members.

The chairman's mark-which is based on a bill (S. 2816) introduced by Baucus and Ranking Member Charles Grassley of Iowa-includes tax breaks for military personnel when they travel for reserve duty, move residences, and pay child care costs. It also improves the tax treatment for membership in veteran's organizations and surviving spouse death benefits.

"This bill does a small part to improve our tax code and, more importantly to pay respect to the men and women who are making sacrifices and risking their lives to defend us all," Baucus said in his opening statement. H.R. 5063 passed the House by a vote of 412-0 in July.

The tax provisions would be paid for by making it easier for the Internal Revenue Service to tax the assets of U.S. expatriates and extending some IRS user fees. The provisions would raise $997 million over 10 years.

The bill provides relief for military personnel who frequently move and sell their homes. Currently, if a home owner lives in his or her primary residence for two of the five years before a sale, he or she can exclude the first $250,000-or $500,000 for a couple-from capital gains tax. The bill suspends the five-year test for up to 10 years for military and foreign service personnel and for the commissioned corps of the National Oceanic and Atmospheric Administration and the Public Health Service.

"It is important to ensure that our military personnel are eligible for the same tax incentives for home ownership available to all Americans," Grassley said in a prepared statement.

The bill would also help personnel whose homes have lost value due to base realignment or base closure. It would exclude from income payments military personnel receive under the Department of Defense Homeowner's Assistance Program (HAP). The program pays up to 95 percent of the fair market value of property prior to a base closure or realignment announcement.

The bill also clarifies that any dependent benefit provided to military personnel would be excludible from gross income. Present law states that qualified military benefits are not included in gross income, but it was unclear if this applied to dependent care benefits.

And, the measure excludes all death gratuity benefits from being taxed as income. Currently, surviving spouses receive a $6,000 death benefit but $3,000 of it is taxable. The exclusion would be effective retroactively to September 10, 2001.

The measure also improves the deductibility of non-reimbursable overnight travel expenses for National Guard and Reserve Members who must travel overnight for reserve duty. The proposal provides for an-above-the line deduction for these expenses. The reservist may deduct these expenses from gross income regardless of whether they itemize.

Under the bill, the lineal descendants and ancestors of current and former military personnel to deduct their contributions to veteran's organizations. It also extends filing deadlines for military personnel assigned to contingency operations. Currently, only military personnel-not contingency personnel-in a combat zone can suspend many tax deadlines while in the combat zone.