Military Family Tax Relief Act of 2003
CRS Report for Congress
Military Family Tax Relief Act of 2003
Erika Lunder
Legislative Attorney
American Law Division
Summary
The Military Family Tax Relief Act of 2003, H.R. 3365, became P.L. 108-121 on
November 11, 2003. The Act provides various types of tax relief to members of the
Armed Forces. Additionally, the Act suspends the tax-exempt status of organizations
involved in terrorist activities, offers tax relief to astronauts who die in the line of duty,
and extends the authorization for certain customs user fees.
The Military Family Tax Relief Act of 2003, H.R. 3365, contains a variety of
measures that are primarily intended to provide tax relief to members of the Armed
Forces. The House of Representatives voted unanimously in favor of the bill on October
29, 2003. The Senate passed a significantly amended version by unanimous consent on
November 3 and the House unanimously approved the Senate amendments on November
Measures Providing Tax Relief to Members of the Military
Expanded eligibility to exclude gain from the sale of a principal
residence (sec. 101). Under section 121 of the Internal Revenue Code (IRC), an
eligible taxpayer may exclude from gross income up to $250,000 ($500,000 if married
filing jointly) of the gain realized from the sale of his or her principal residence. One
eligibility requirement is that the taxpayer must have used the property as a principal
residence for at least two of the five years preceding the date of sale. The Act amends
section 121 so that a taxpayer may elect to suspend the five-year period for up to ten years
during the time that the taxpayer or the taxpayer’s spouse is on qualified official extended
duty.1 Qualified duty is serving for more than 90 days or an indefinite period at a duty
station that is at least 50 miles from the residence or while residing under orders in
Government quarters. The new rule applies to sales and exchanges made after May 6,
1 Members of the Foreign Service also qualify to make the election.
Congressional Research Service ˜ The Library of Congress
the original filing date or two years after the tax was paid,2 the Act grants taxpayers one
year to file for a refund even though it may otherwise be barred. The one-year period
began on November 11, 2003.
Exclusion of the military death benefit from gross income (sec. 102).
Under IRC § 134, qualified military benefits are excluded from gross income. The
exclusion is limited to benefits that (1) are made on account of the taxpayer’s status or
service as a member of the Armed Forces and (2) were excusable on September 9, 1986.
Any benefit increase after September 9, 1986 is included in income, unless it is a cost-of-
living adjustment or similar increase. The death gratuity payment made to the survivors
of members of the Armed Forces who die while on active duty is a qualified military
benefit.3 The payment was $3,000 on September 9, 1986 and it was later increased to
$6,000. Thus, prior to the Act, the $3,000 increase was included in income.
The Act makes two changes related to the death gratuity payment. First, the benefit
is increased from $6,000 to $12,000. Second, the entire payment, including any future
increases, is excluded from gross income. The changes apply for all deaths occurring
after September 10, 2001.
Exclusion of payments made to offset the negative effect of base
closure on housing values (sec. 103). Under the Homeowners Assistance Program
found in 42 U.S.C. § 3374, the Department of Defense may offer payments to members
of the Armed Forces whose housing values have decreased due to military base
realignment or closure. Prior to the Act, such payments did not qualify for exclusion from
gross income. The Act amends IRC § 132 so that payments made after November 11,
Expanded eligibility for tax-related deadline extensions (sec. 104).
Under IRC § 7508(a), individuals serving in a Presidentially-declared combat zone are
allowed extra time to complete a variety of tax-related activities, including filing returns
and paying taxes. The Act expands the group of taxpayers eligible for the extensions to
individuals serving in a contingency operation as determined under 10 U.S.C. §
101(a)(13). Examples of contingency operations include operations where members of
the Armed Forces are or may become involved in hostilities against a foreign enemy and
operations during national emergencies that require the call up of members of the Armed
Forces. The new rule applies for any period for performing an act that did not expire
before November 11, 2003.
Expanded eligibility for tax-exempt status for military organizations
(sec. 105). Under IRC § 501, military organizations may qualify for tax-exempt status
if (1) at least 75% of the members are past or present members of the Armed Forces and
(2) substantially all of the other members are cadets or spouses, widows, or widowers of
past or present members of the Armed Forces or of cadets. The Act eases the
“substantially all” requirement by allowing ancestors or lineal descendants of past or
present members of the Armed Forces or of cadets to be included. The change applies to
taxable years after November 11, 2003.
2 IRC § 6511.
3 The provision for the death gratuity payment is found in 10 U.S.C. § 1478(a).
Clarification of treatment of dependent care assistance programs (sec.
106). The tax treatment of payments made to members of the Armed Forces under
dependent care assistance programs has been unclear. The Act amends IRC § 134 to
make it clear that these payments are subject to exclusion as a qualified military benefit.
Thus, if a payment meets the qualifications in section 134, it may be excluded from
income. The change applies for taxable years after December 31, 2002.
Tax favored status for distributions to military academy attendees from
education savings accounts (sec. 107). Under IRC § 530(d), a portion of a
distribution made from a Coverdell education savings account that exceeds the taxpayer’s
educational expenses is included in gross income and penalized by an additional tax. The
Act exempts distributions made to attendees of military academies from the additional
tax. The exemption is limited to the attendee’s “advanced education costs” that are
described in 10 U.S.C. § 2005(e)(3). The change applies for taxable years after December
Deduction for overnight travel expenses of National Guard and Reserve
members (sec. 109). Prior to the Act, overnight travel expenses of National Guard
and Reserve members were deductible only by taxpayers who itemized their deductions,
subject to the limitation on miscellaneous itemized deductions. The Act creates an above-
the-line deduction for these expenses. The expenses are limited to the general Federal per
diem rate and must be incurred while the reservist is serving more than 100 miles from
home.4 The change applies to expenses paid or incurred after December 31, 2002.
Other Measures
Suspension of tax-exempt status for terrorist organizations (sec. 108).
The Act suspends the tax-exempt status or the application for such status for any
organization that is either (1) designated a terrorist organization by executive order or
under authority found in the Immigration and Nationality Act, the International
Emergency Economic Powers Act, or the United Nations Participation Act or (2)
designated by executive order as supporting terrorism or engaging in terrorist activity. No
deduction is allowed for any contribution to the organization during the suspension. The
suspension lasts until the designation is rescinded under the authority by which it was
made. No challenges to the suspension, designation, or denial of a deduction are allowed
in any proceeding concerning the tax liability of the organization or another taxpayer. The
new rules apply to all designations, whether made before, on or after November 11, 2003.
Tax relief for astronauts killed in the line of duty (sec. 110). The Act5
provides tax relief to astronauts who die in the line of duty after December 31, 2002.
First, astronauts are not subject to the income tax in the year of death and in earlier years
4 While the Act is silent on this matter, it would appear that reservists could continue to deduct
overnight travel expenses as an itemized deduction without being subject to these two limitations.
The ability to deduct the expenses would then be subject to the limitation on miscellaneous
itemized deductions.
5 The relief is generally similar to that provided to specified victims of terrorism in the Victims
of Terrorism Tax Relief Act of 2001, P.L. 107-134.
beginning with the taxable year prior to that in which the mortal injury occurred.6 If the
tax liability for those years, disregarding the exemption, is less than $10,000, then the
taxpayer is treated as having made a tax payment in the final taxable year that is equal to
$10,000 less the liability. Further, the Act excludes employee death benefit payments
from the astronaut’s income7 and applies reduced estate tax rates to the astronaut’s estate.8
Extension of customs user fees (sec. 201). The authorization for the
customs user fees found in 19 U.S.C. § 58c(j)(3) is extended from March 31, 2004 to
March 1, 2005.
6 IRC § 692.
7 IRC § 101(i).
8 IRC § 2201.