“Military service makes taxes complicated and sometimes unfair,” said Grassley. “People shouldn’t suffer a tax hit to serve our country. We need to make sure military men and women have fair treatment under the tax code. It’s a no-brainer.”
The bill addresses a number of issues:
Originally posted at "Iowa Independent"
• It would make permanent a temporary tax provision allowing pay earned in a combat zone, which is not subject to income tax, to still be counted as income solely for the purpose of qualifying for the Earned Income Tax Credit. If troops cannot count untaxed income for that purpose, many would show no taxable income and thus would not qualify for the earned-income credit.
• For survivors, the bill allows the $100,000 death gratuity paid for an active-duty death to be put into an Individual Retirement Account or other tax-deferred retirement plan. The change would encourage survivors to save the money for old age.
• For military retirees who wait a year or longer to have veterans’ disability claims resolved, payments often are retroactive. The bill would make it easier for those with retroactive payments to claim a tax refund, which they would receive because some of their past retired pay would then become tax-free. Current law limits tax refunds to three years from the date of filing a tax claim, which ends up hurting some disabled veterans who, through no fault of their own, have waited far longer than three years to get their benefits. The bill would extend the statute of limitations to one year after a VA disability decision is made.
• When civilian employers make up the difference between civilian pay and military pay of mobilized National Guard and reserve members, the Internal Revenue Service requires special reporting for the differential pay that creates a burden for employers and employees. The bill would allow them to use the normal W-2 form to report income for differential payments and would treat the money as normal wages.
• Small businesses with fewer than 50 employees would get a tax credit for making up the salary of reserve component employees who are called to active duty. The tax credit would be equal to 20 percent of the differential pay, with a cap of $20,000 a year.
• Guard and reserve members called to active-duty for at least 179 days would be able to make penalty-free withdrawals from tax-deferred retirement plans. Current law imposes a 10 percent early withdrawal penalty for withdrawals made before age 59½.
• For three years, qualified mortgage bonds — used by some states to help veterans buy homes — would be available to veterans who are first-time homebuyers. The bond authority is set to expire at the end of the calendar year.