Since today is Veteran’s Day, I wanted to start my blog talking about something, which is important to me. (Full disclosure: I served in the US Navy for over 8 years and I am proud to continue to serve Servicememebers through my company.) I wanted to write about some of the issues, which might come up, if a servicemember dies or is hurt in the line of duty. There are only two things in life certain – Death and Taxes. Today, I will discuss both.
The large picture is over the past few years, we have been drawing down from our conflicts overseas in some areas, and increasing our roles in others. It is also well known, our nation faces challenges overseas, which may call us to action again.
On the smaller scale (the individual), the IRS allows amendments of tax returns up to 3 years after the filing date, the due date (normally April 15, but could be later) or 2 years after the tax is paid, whichever is later, and in some cases, even further in the past. If you know someone who has had a family member pass away or was injured in a combat zone within the past three years, this article might apply to them; however, in addition there are other aspects of the law, which might help them in their time of need and they need to contact their attorney, CPA or EA about their options. If they are incapable of doing so, as their caregiver, you can call on their behalf, for an initial consultation.
Society, through the actions of the federal government, attempts to show its gratitude to members of the armed forces, who die in the line of duty in an active combat zone, through forgiveness of taxes owed on the income received by that servicemember. The following are directly from the law as it is written today:
- With respect to the taxable year in which falls the date of his [or her] death, or with respect to any prior taxable year ending on or after the first day he [or she] so served in a combat zone after June 24th, 1950; and
- Any tax under this subtitle and under the corresponding provisions of prior revenue laws for taxable years preceding those specified in paragraph (1) which is unpaid at the date of his [or her] death (including interest, additions to the tax, and additional amounts) shall not be assessed, and if assessed the assessment shall be abated, and if collected shall be credited or refunded as an overpayment.
What the above means in English is that under certain conditions, a servicemember, who dies in a combat zone (or any terroristic activity) shall not owe taxes! As I read both the sections of the law and the regulation dealing with this section, the amount of tax forgiveness starts the year in which you arrive in the foreign country, but it is only attributable to the amount paid to the servicemember, and not any additional income (rental properties, partnership income, investment income, etc.)to INCLUDE spousal income.
It is this last line, which needs focus. The income a spouse receives from his or her employment, while the servicemember is stationed in the combat zone, is NOT excludable from income taxes under these rules, nor is the income received in the year of death of the servicemember. In fact, the regulations deal with how the amount of the exclusion is to be calculated; this can get convoluted. It is recommended that you consult with CPA, if you think that you may qualify for relief under this condition. If you don’t have a CPA, please feel free to reach out to Beta Solutions CPA here.
Hospitalization of Servicemembers in a Combat Zone
Many people might know about the exclusion of income while serving in a combat zone, but I remember when I was in the US Navy: Live by the Gouge, Die by the Gouge; therefore, I am going to put some black and white on this. §112 of the tax code deals with combat pay exclusions. It is known, if you serve in a combat zone, you will qualify for a combat exclusion, if you meet the conditions under these rules. This is great if you are healthy, but what if you get sick after eating some really bad food and you are sent to Europe for further observation for two months? Did you bust your exclusion?
The tax regulations dealing with hospitalizations states, “if an individual is hospitalized for wound, disease, or injury while serving in a combat zone, the wound disease or injury will be presumed to have been incurred while serving in a combat zone, unless the contrary clearly appears.” So, “no” you did not bust your exclusion and the pay, while in the hospital is excluded.
Right Before Retirement
Remember the line in the movies, where the guy gets shot, he says “And only six days before retirement!” right before dying. Servicemembers can sympathize with that, because we all have dealt with Murphy’s Law. Turning to a more serious note though, imagine you are on patrol one week before the end of combat operations in Afghanistan and you are injured. The IRS regulations will continue to provide relief under the rules. If you have further questions about this, please feel free to email me at email@example.com, or here.
Agent Orange-like Cases
What happens if a servicemember comes back from the combat zone and experiences symptoms of a disease and is hospitalized (while on active duty). If the disease is determined to be contracted in a combat zone (where the incubation period is showed to put the exposure in the combat zone) and hospitalization occurs, the pay is excludable under the law, but only pay, which is servicemember’s pay and excludable under the law. However, the exclusion is only if the hospitalization for the disease occurs within 2 years of termination of the combat zone status.
The best case for the above exclusion, which I can think of, would be exposure to Agent Orange, where the onset of the disease was years after exposure. It would be likely symptoms would appear after returning home. An interesting point on this is the Vietnam War was specially excluded under the law and the two-year limit, as listed above, does not apply (the onset of Agent Orange is so long, it may not show up for decades). But as there are likely no active duty people who served in Vietnam in the military at this time, this use of this code for Vietnam serving active duty servicemembers might be limited.
If your situation is unique due to military service, please feel free to contact Beta Solutions CPA to meet your tax compliance and planning needs. We have the military experience to understand your situation and the tax know-how to work through your situation. Please feel free to contact us here.
Disclosure: This blog was posted on MOAA’s blog June 23rd, 2014. For the purposes of today’s blog (November 11, 2016), I have modified it as it was originally posted. I did write the original blog. The blog is currently posted here. Please feel free to read the original blog as some information was removed in order to truncate this blog.