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While you were likely planning your Memorial Day picnic or other holiday activities with family and friends, Congress was scrambling to finish some important tax bills. Just before Memorial Day, Congress passed $1.2 billion in tax breaks for military personnel and their families and also $1.7 billion in tax relief for farmers and ranchers. Although the tax relief is not as large as in some past bills, they are nonetheless important. At the same time, Congress is debating even more tax relief, which could be enacted before year-end.
Military tax relief
Let's take a look at the tax incentives in the military tax relief act (the Heroes Earnings Assistance and Relief Act) first.
These tax breaks are targeted to servicemen and women on active duty, reservists who are called to active duty, military
families, and employers. Here are some of the highlights of the military tax relief act:
Combat pay. Tens of thousands of U.S., troops are serving in combat zones around the world. Combat pay
is tax-free. However, this tax-free treatment can cause some military families to loose eligibility for the earned income
credit. The military tax relief act treats combat pay as earned income for purposes of the earned income credit. This treatment
is permanent and is also retroactive December 31, 2007.
Stimulus payments. The IRS is currently distributing millions of economic stimulus payments every week.
However, some military personnel have been missing out. When Congress authorized the payments, it restricted them to
individuals with valid Social Security numbers. If a serviceman or woman is married to an individual who does not have a
Social Security number, the couple will not receive an economic stimulus payment if they file a joint tax return. The new
law directs the IRS to issue stimulus payments to these military families so long as one spouse is serving in the military
and has a valid Social Security number.
Retirement and other plans. When a reservist is called to active duty, he or she may want to make an
early withdraw from a 401(k) plan or other retirement arrangement. Generally, there is an early-withdraw penalty. The
military tax relief act permanently waives this penalty for reservists who are called to active duty for at least 179
days.
The reservist generally has two years after the end of the active duty period to repay (in one or more contributions)
the amount of the distribution.
Death benefits. Survivors of servicemen and women who die in the line of duty (and in some other circumstances)
receive tax-free death benefits. The military tax relief act gives survivors more choices about where to invest these benefits.
Survivors can contribute all or part of the proceeds into a Roth IRA without having to worry about income and contribution limits.
The same treatment is available for Coverdell Education Savings Accounts. At the same time, the new law also enhances the benefits
that survivors receive under some employer-provided plans.
Veterans bonuses. Many states pay combat veterans a bonus when they return home. The military tax relief act clarifies
that these bonuses are tax-free.
Employers. When a reservist is called to active duty, he or she has to leave their current employer. Some employers
voluntarily pay the difference between the reservist's regular pay and his or her military pay. The new law gives small employers
a temporary tax credit for this so-called differential pay. The new law also treats differential pay as wages, which will make it
easier for employers to contribute to the reservist's employer-sponsored retirement plans.
The military tax relief act pays for these and other incentives by changing the federal tax treatment of individuals
who renounce their U.S. citizenship for tax purposes. The new law also treats foreign subsidiaries of U.S. companies
as American employers for purposes of Social Security and Medicare taxes, increases the failure to file a tax return
penalty and extends a special mental health parity excise tax.
Farm Act
Now, let's take a look at the farm act (the Conservation, Food and Energy Act of 2008). The tax incentives in the farm
act are designed to help farmers and ranchers but some of the provisions have a wider impact. Here are some of the
highlights:
Charitable contributions. Several years ago, Congress enhanced the deduction for charitable contributions
of real property for conservation purposes. Individual donors of real property for conservation purposes were eligible to
take a deduction of up to 50 percent of their contribution base, rather than the usual 20-percent limitation. If the donor
is also a farmer or rancher the limit rises to 100 percent of the taxpayer's contribution base. This special treatment was
temporary and expired at the end of 2007. The farm act extends it for two more years.
Retired and disabled farmers. Under the farm act, Conservation Reserve Payments (CRP) made to retired
or disabled farmers, which would otherwise reduce Social Security benefits, will be excluded from net income from self
employment. This special treatment is effective for CRP payments made after December 31, 2007.
Social Security coverage. The farm act also helps farmers (and nonfarmers) secure more Social Security
coverage by increasing and indexing the dollar thresholds for purposes of the farm optional and nonfarm optional methods
of computing net earnings from self employment, This treatment is effective for tax years beginning after December 31, 2007.
Along with these incentives, the farm act also raises the limits for agricultural bonds, creates new forestry conservation
bonds, helps victims of a 2007 tornado in Kansas, and provides a credit for the production of cellulosic biofuel. The farm
act pays for its tax incentives by limiting the amount of farm losses that can be utilized against non-farming business
income by a taxpayers receiving certain subsidies. Other revenue raisers in the farm bill reduce the ethanol production
tax credit and impose information reporting requirements are imposed on certain farm loans.
Genetic Nondiscrimination Act
The Genetic Information Nondiscrimination Act of 2008, signed by the president on May 22, prohibits discrimination on the basis of genetic information with respect to health insurance and employment. While this new law is not focused on the tax law, it does devote one main section to amend the Internal Revenue Code to require any employer-sponsored health plan that allows employers to deduct contributions to it to include language specifically prohibiting genetic discrimination. These additions to the tax code require that there be:
- No discrimination in group premiums based on genetic information;
- No request or requirement by a group health plan that any individual or a family member undergo a genetic test; and
- No purchase or other acquisition of genetic information with respect to any individual in connection with health plan enrollment.
To enforce these prohibitions, Congress also used the tax code to levy steep excise tax penalties on health plans that do not conform to the new rules. While the new law itself is not to go into force generally until May 23, 2009, many of the provisions are restatements of federal or state laws already in force.
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