Congress Passes Military Tax Relief Legislation

On May 22, 2008, following similar action in the House on May 20, the Senate unanimously approved the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 (HR 6081). The legislation would allow military personnel to qualify for economic stimulus payments even though a spouse does not have a Social Security number, make permanent the ability to include combat pay as earned income under the Earned Income Tax Credit, make permanent and modify the availability of qualified mortgage bonds used to finance veterans’ residences, allow the day prior to the date of death to be treated as the date an employee in the military returned to work for purposes of qualified plan benefit distributions, permit an employer to make contributions to a qualified plan on behalf of an employee killed or disabled in combat, treat differential wages paid to an employee called to the military as wages for withholding and retirement plan purposes and create a small employer tax credit for differential wages, extend the limitations period for tax refund credit claims with respect to veterans’ disability determinations, make permanent the ability of reservists to make penalty-free withdrawals from retirement plans and permit reservists to make penalty-free withdrawals from flexible spending accounts, make permanent the ability of the Social Security Administration to disclose information to the Veterans’ Administration for purposes of determining veterans’ program eligibility, clarify that state payments to service members are treated as qualified military benefits, and permit recipients of military death benefit gratuities to roll the sums over tax-free to a Roth IRA or Coverdell Education Savings Account. Three provisions address Supplemental Security Income eligibility for military personnel, veterans, and Americorps volunteers. Provisions are also included to address the sale of a principal residence by Peace Corps volunteers and members of the intelligence community and to clarify that certain property tax rebates and other benefits made with respect to volunteer firefighters and excluded from gross income are not subject to Social Security tax or unemployment tax.

To pay for these provisions, the legislation revises the expatriation tax rules, treats domestically controlled foreign persons performing services under contract to the United States as U.S. employers, increases the failure to file penalty, and extends the excise tax for failure to comply with mental health parity requirements.

The legislation now moves to the President for his expected signature.