HEART Act Tax Relief

House-passed Heroes Act would provide tax relief to military members & their families

On May 20, by a vote of 403-0 the House of Representatives unanimously approved H.R. 6081, the “Heroes Earnings Assistance and Relief Tax Act of 2008.” The bill, dubbed the HEART Act by its sponsors, is very similar to the version of H.R. 3997 (the “Heroes Earnings Assistance and Tax Relief Act of 2007”) that was passed by the House of Representatives in the waning days of 2007 but failed to pass the Senate. The bill would provide targeted tax relief for members of the military and their families, fully offset with tightened expatriation rules, a new rule requiring U.S. companies working under federal government contract to treat overseas employees as subject to employment taxes, and a higher failure to file penalty.

    Caution: Several of the HEART Act relief provisions would create significant compliance and plan amendment challenges for tax qualified retirement plans and their sponsors.

The press staff for Speaker of the House Nancy Pelosi (D-CA) has said that H.R. 6081 is the “final agreement with the Senate that is expected to be sent to the President by Memorial Day.”

Here’s a roundup of the tax provisions in the HEART Act:

    • Clarify that those in the active military who file a joint tax return are eligible for the stimulus rebate payment under the Economic Stimulus Act of 2008 even if one spouse does not have a Social Security number.
    • Make permanent the ability to treat combat pay as earned income for purposes of the earned income tax credit.
    • Make permanent and modify provisions relating to qualified mortgage bonds used to finance residences for veterans.
    • Modify the Uniformed Services Employment and Re-employment Rights Act (USERRA) to allow the day before the date of death to be treated as the date the employee returned to work for purposes of triggering payment of benefits under a qualified plan. The bill would also permit an employer to make certain contributions to a qualified pension plan on behalf of an employee who is killed or become disabled in combat. These changes would apply to deaths and disabilities occurring after 2006.
    • Treat differential wages paid by an employer to an employee who goes on active military duty as wages for withholding, retirement plan, and IRA purposes. The wage withholding change would apply for remuneration paid after 2008; the other changes would apply for years beginning after 2008.
    • Provide small employers with a 20% tax credit for differential wage payments made to employees who are on active military duty. The credit would apply for amounts paid after the enactment date and before 2010.
    • Extend the limitations period for filing tax refund credit claims arising from Department of Veterans Affairs (DVA) disability determinations, effective for claims for credits or refunds filed after the enactment date.
    • Make permanent expiring rules that permit active duty reservists to make penalty-free withdrawals from retirement plans.
    • Make permanent an expiring provision authorizing the Social Security Administration (SSA) to disclose tax return information to the DVA for purposes of determining eligibility for certain veteran’s programs.
    • Permit recipients of military death benefit gratuities to make tax-free rollovers of amounts received to a Roth IRA or a Coverdell Education Savings Account. In general, this provision would apply for payments made on account of deaths from injuries occurring after the enactment date, but such rollovers would be permitted for amounts received with respect to deaths from injury occurring after Oct. 6, 2001 and before the enactment date, if the rollover is completed no later than one year after the enactment date.
    • Effective for tax years beginning after 2007, liberalize the home sale exclusion rules for Peace Corps volunteers by making them similar to the rules that apply to those in the military, the foreign service, and the intelligence community. The bill also would make permanent the special home-sale exclusion rules for certain employees of the intelligence community, and for sales or exchanges after the enactment date, repeal the requirement that such employees move overseas in order to qualify for special treatment.
    • Effective for payments made before, on, or after the enactment date, provide an exclusion for state or local payments of bonuses to active or former military personnel or their dependents on account of such military personnel’s service in a combat zone.
    • For distributions made after the enactment date, allow members of the reserves who are called to active duty to withdraw amounts held in a Flexible Spending Account (FSA) without penalty.
    • Retroactively clarify that certain property tax rebates and other benefits made with respect to volunteer firefighters, and excluded from gross income under the Mortgage Debt Forgiveness Debt Relief Act of 2007, are not subject to Social Security tax or unemployment tax.
    • Tighten the expatriation rules to ensure that certain high net-worth taxpayers can’t renounce their U.S. citizenship or terminate their U.S. residency in order to avoid U.S. taxes. High-net-worth individuals would be treated as if they sold all of their property for its fair market value on the day before they expatriate or terminate their residency. Gain would be recognized to the extent that the aggregate gain recognized exceeds $600,000 (which would be adjusted for cost of living in the future). The provision would apply for those who relinquish U.S. citizenship or terminate their U.S. residency on or after the enactment date.
    • For services performed in calendar months beginning more than 30 days after the enactment date, treat foreign subsidiaries of U.S. companies performing services under a U.S. government contract as American employers for employment tax purposes. The domestic parent would be jointly liable for employment taxes imposed on the foreign subsidiary.
    • Effective for tax returns required to be filed after 2008, increase the general penalty for failure to file tax returns within 60 days of the due date to the lesser of $135 or 100% of the amount required to be shown on the return.
    • Extend current law’s excise tax for failure to comply with the mental health parity requirements for benefits for services furnished on or after the enactment date through Dec. 31, 2008.