The Internal Revenue Service is helping Military personnel with a new law that gives income exclusions for death benefits and specific types of home sales. Some qualifying taxpayers need to file an amended return in order to claim these tax breaks. The IRS has asked that they put the words “Military Family Tax Relief Act” in red at the top of these returns to speed up the processing of the forms.

This new law doubles the benefit that is paid to survivors of deceased  Military personnel to $12,000. It makes the whole amount tax-free and the changes are effective for deaths that occurred after Sept. 10, 2001. Only $3,000 was tax-free before this new law took affect. Those who already received these benefits paid taxes on the benefits that were received for deaths after the effective date have the option of filing an amended return on the 1030X Form, which will reduce their adjusted gross income by the $3,000 they had previously reported as taxable. For those who got these benefits in 2003, and all future years, won’t have to report them on their tax returns.

Some taxpayers may even be able to exclude the gain on the sale of their home if they have owned and used the home as their primary residence for at least two of the five years before the sale. A maximum exclusion may apply to taxpayers who are serving in the Military who fulfil at least part of the two-year rule. Some Military personnel keep ownership of a home while they are away on active duty but when they return, they sell it without living in it. This may cause them to become disqualified for the exclusion.

The new law allows taxpayers on extended duty in the Military or who are serving overseas to suspend this five-year period for up to 10 years during their tour. They are considered to be on “qualified” extended duty when they are stationed at least 50 miles from the residence they intend to sell, or when they are living in government housing under Military orders for more than 90 days, or for an indefinite period.

These changes apply only to home sales that take place after May 6, 1997. The Military taxpayer can use this provision for one property at a time. They may also exclude the gains on only one home sale in a two-year period. The law allows for qualified Military taxpayers who sold their homes before 2001 until November of 2011 to file their amended returns in order to claim the exclusion, even though a regular amended return must be filed within three years of the original return’s due date.

You need to use the 4506 Form, “Request for Copy or Transcript of Return,” to get a previous  year’s tax return. This form, and the 1040X Form can be found on the IRS Web site.  If you need more information, consult a tax professional. 

 Daniel Stoica Accounting Professional