June 12,2007

Baucus-Grassley Bill Offers Tax Relief to America's Fighting Men and Women

Washington, DC – U.S. Senators Max Baucus (D-Mont.) and Chuck Grassley (R-Iowa), Chairmanand Ranking Republican Member of the Senate Finance Committee, today led a dozen fellowSenators in introducing legislation to provide significant tax cuts for American troops and theirfamilies. The Defenders of Freedom Tax Relief Act helps members of the military when theyreceive combat pay, save for retirement, or purchase their own homes. The bill also includes tax helpfor employers of military reservists and for members of the National Guard who provide assistance toemployees who are called to active duty.

“I introduced this legislation out of deep respect for our nation’s military. This bill honors andvalues the sacrifices that the men and women of the armed services make for our country everysingle day,” said Baucus. “This legislation puts dollars in the pockets of soldiers and veterans,and gets rid of unnecessary tax restrictions for military families who have more importantthings to worry about than red tape. There are often no words to express our thanks, but it ismy hope this bill will show our troops that we recognize their contributions to our freedom.”Grassley said, “Military service makes taxes complicated and sometimes unfair. Peopleshouldn’t suffer a tax hit to serve our country. We need to make sure military men and womenhave fair treatment under the tax code. It’s a no-brainer.”The Senators’ bill includes more than $550 million in tax relief for veterans, soldiers and theiremployers. Provisions in the legislation will:?? Make permanent a provision that allows soldiers to count their non-taxable combat paywhen figuring their eligibility for the earned income tax credit, a refundable federalincome tax credit that puts cash in the hands of low-income working individuals andfamilies.?? Allow all veterans—not just first-time homebuyers—to use qualified mortgage bondsto purchase their homes?? Cut taxes for small businesses when they continue paying some salary to members ofthe National Guard and Reserve who are called to duty?? Eliminates cumbersome rules for reporting of income when companies continuepaying some salary to members of the National Guard and Reserve who are called toduty. This makes it easier for reservists to file their taxes and simpler for employersto keep contributing to those employees’ retirement plans.?? Allow the families of soldiers killed in the line of duty to contribute up to 100 percentof survivor benefits to a retirement savings account?? Allow active duty troops to withdraw money from retirement plans and give themtwo years to replace the funds without tax penalty?? Extend a provision that gives retired veterans more time to claim a tax refund onsome types of disability benefit payments?? Make permanent a provision that gives intelligence service employees a longer periodof time to meet residency requirements necessary to exclude profits from the sale oftheir home from capital gains tax, which is often necessary due to frequentdeployment?? Give the IRS the authority to treat gifts of thanks from states to veterans—such aspayments of excess state revenue—as nontaxable gifts

More details on the bill’s provisions and their costs can be found on the Finance Committeewebsite by clicking here. See below for a short summary.

The bill is paid for with two offsets. The first makes certain that individuals who relinquish theirU.S. citizenship or long-term U.S. residency pay the same Federal taxes for appreciation ofassets, such as stocks or bonds, that they would pay if they sold them as U.S. citizens orresidents. The second extends a provision that allows the Social Security Administration toshare earnings information so that accurate amounts of pension, dependency and indemnitycompensation, hospice care, or unemployment compensation is paid to veterans and theirfamilies.

Additional sponsors of the bill include Senators Jay Rockefeller (D-W.Va.), Kent Conrad (DN.D.), Jeff Bingaman (D-N.M.), Olympia Snowe (R-Maine), John Kerry (D-Mass.), BlancheLincoln (D-Ark.), Gordon Smith (R-Ore.), Chuck Schumer (D-N.Y.), Debbie Stabenow (DMich.),Maria Cantwell (D-Wash.), Pat Roberts (R-Kan.), and Ken Salazar (D-Colo.). A numberof elements in the bill mirror or build on provisions proposed by members of the FinanceCommittee, including Rockefeller, Kerry, Lincoln, and Smith. The Committee, which hasjurisdiction over tax policy, will formally consider the Defenders of Freedom Tax Relief Act thismonth.
DEFENDERS OF FREEDOM TAX RELIEF ACT OF 2007Title Description 10-YearCost

1. Expansion of qualifiedmortgage bond program forveteransQualified mortgage bonds may be issued to financemortgages for veterans who served in active militarywithout regard to the first-time homebuyer requirement.This exception to the first-time homeownershiprequirement expires on December 31, 2007. Theproposal would extend this provision for three years.Veterans may use the exception one time only. Presentlaw income and purchase price limitations wouldcontinue to apply to loans to veterans financed with thequalified mortgage bond proceeds. Veterans would beeligible without regard to the date they last served onactive duty.$ 431 M2. Permanent extension ofelection to include combatpay as earned income forEITCCombat pay is not subject to income tax. However, thisprovision can lead to lost tax benefits for lower-incomeservice people because the earned income tax credit(EITC) requires some taxable income in order to qualify.A change to EITC was enacted that allows servicepeople to elect to include their combat pay as earnedincome for purposes of EITC. This provision expires onDecember 31, 2007. The proposal would make thiselection permanent.$ 83 M3. Extension of the statute oflimitations when militaryretired pay is reduced as aresult of award of disabilitycompensationMost VA disability claims filed by military retirees areresolved in less than a year. But lost paperwork,administrative errors, and appeals of rejected claimsdelay thousands of disability awards for years. The VAdisability award is retroactive to the date of theapplication and makes a portion of past military retiredpay tax-free. But to claim a tax refund, disabled veteransmust file an amended tax return for each applicableyear. The statute of limitations for filing a tax refundexpires generally after three years from the date of filingthe tax return. As a result, disabled veterans are barredfrom receiving tax refunds through no fault of their own.The proposal extends the statute of limitations until theend of the 1-year period beginning on the date of the VAdisability determination.$ 10 M44. Differential military paytreated as a payment ofwagesWhen a National Guardsman or Reservist is called up toactive duty, their civilian job and civilian salary areplaced on hiatus and they begin receiving military pay -an amount which may be significantly less than theircivilian salary. There are currently many employers whovoluntarily eliminate any pay gap by paying thedifference. Currently the IRS treats these differentialpay payments as benefits requiring reporting on theForm 1099. This is a burden for the employee and theemployer. The proposal would treat the differential paypayments as wages requiring the information reportingon the more easily accessible Form W2 and subject thedifferential pay payments to withholding. The proposalwould also make it easier for employers to contribute totheir activated employee’s retirement plans while theemployees are serving in active duty.$ 8 M5. Tax credit for smallemployers of EmployeeReservists and NationalGuardsmen called for activedutyThis proposal would provide an incentive for smallemployers to eliminate any pay gap existing forreservist/employees between civilian and military pay.The proposal would provide small businesses of lessthan 50 employees a tax credit up 20% of the differentialpay (up to $20,000) that the employer pays to anyemployee who is called up for active duty.$ 9 M6. Penalty-free withdrawalsfrom retirement plans forreservists called to activedutyGenerally, a taxpayer who receives a distribution from aqualified retirement plan prior to age 59 ½ is subject to a10-percent early withdrawal tax. In 2006, an exceptionto this 10-percent early withdrawal tax was provided forqualified reservists called to active duty for at least 179days. Under this exception, the reservist may make anearly withdrawal from a retirement plan withouttriggering the withdrawal tax and the reservist has twoyearsfrom the last day of the active duty period tocontribute distributions to an IRA. This exception expireson December 31, 2007. The proposal would make thisexception permanent.$ 6 M7. Roll-over of military deathgratuities to tax-favoredaccountsThe Defense Department provides $100,000 paymentsto the survivors of soldiers killed in the line of duty.However, restrictions exist limiting a survivor’s ability tocontribute his or her gratuity payment to certain taxfavored accounts. The proposal would allow survivorsto contribute any amount up to the sum of the gratuitypayment into a Roth IRA account.$ 3 M58. Exclusion of gain from sale ofprincipal residence forintelligence serviceemployeesCurrent law provides an exclusion from capital gainstax of $250,000 ($500,000 for married couples) fromthe sale of a primary residence if the taxpayer ownedand lived in the residence for at least 2 of the 5 years.In 2003, Congress changed the law to permit militaryservice personnel and foreign service officers to toll the5-year period for up to 10 years while they arestationed 50 miles from home. In 2006, the sameresidency requirement exception was extended tointelligence service employees, except that it requiresthat the intelligence officers be stationed overseas.The intelligence community provisions expire onDecember 31, 2010. The proposal would make theexception permanent. Also this proposal would nolonger require intelligence officers to be stationedoverseas in order to make use of the residencyrequirement exception. This would provide equaltreatment to military service personnel, foreign serviceofficers, and intelligence officers.$ 3 M9. Treat State payments toservice members asnontaxable giftsStates often pay excess state revenue to servicemembers as thanks for their war service. Gifts are notsubject to income tax. Courts have defined a gift aspayments proceeding out of “detached anddisinterested generosity” and not any “moral or legalduty” or “from an incentive of anticipated benefit.” TheIRS currently treats payments made by a State to or onbehalf of veterans who served in war as nontaxablegifts but the IRS lacks statutory authority for thistreatment. This provision would codify IRS practice.NegligibleRevenueEffect6Revenue Offsets1. Market-to-Market tax onIndividuals whoexpatriateCurrent tax rules for individuals who relinquishtheir U.S. citizenship or long-term U.S. residencyare difficult to administer and the taxes are drawnout over 10 years. The proposal would impose anew ‘mark-to-market’ tax on certain U.S. citizensand long-term residents who terminate their U.S.residence. In general, such individuals would betaxed on the net unrealized gain in their property,as if such property were sold for fair market value(hence, mark-to-market) on the day prior to theexpatriation or the U.S. residency termination. Anyloss from the deemed sale generally would betaken into account to the extent otherwise providedin the tax code. Any net gain on the deemed saleis recognized to the extent it exceeds $600,000.$ 444 M2. Allow the SSA todisclose returninformation to the VACurrent law allows the Social SecurityAdministration to disclose tax return informationregarding net earnings for purposes of verifyingany needs-based pension, dependency andindemnity compensation to parents of a deceasedveteran, hospice care, or certain unemploymentcompensation. This provision expires onSeptember 30, 2008.$ 164 M