On June 12, Senators Max Baucus (D-MT) and Chuck Grassley (R-IA), Chairman and Ranking Republican Member of the Senate Finance Committee, introduced the “Defenders of Freedom Tax Relief Act.” The bill is designed to help members of the military when they receive combat pay, save for retirement, or buy homes. It also includes tax help for employers of military reservists and for members of the National Guard who provide assistance to employees who are called to active duty. The bill has twelve additional cosponsors.

The “Defenders of Freedom Tax Relief Act” would:

• Make permanent the provision that allows soldiers to count their nontaxable combat pay when figuring their eligibility for the earned income tax credit. Under current law, this provision expires at the end of 2007.
• Extend for three years the provision allowing qualified mortgage bonds to be issued to finance mortgages for veterans who served in active military duty, without regard to the first-time homebuyer requirement. Under current law, this provision expires at the end of 2007.
• Create a tax credit of up 20% of the differential pay (up to $20,000) that a small business (less than 50 employees) pays to any employee who is called up for active duty.
• Require differential pay to be reported on Form W-2 (instead of on Form 1099), thereby easing paperwork burdens for both employers and employees.
• Allow families of soldiers killed in the line of duty to contribute up to 100% of survivor benefits to a retirement savings account
• Make permanent the provision allowing active duty troops to withdraw money from retirement plans and replace the funds within two years without a tax penalty. Under current law, this rule expires at the end of 2007.
• Give retired veterans more time to claim a tax refund on some types of disability benefit payments.
• Make permanent a provision that gives intelligence service employees a longer period of time to meet residency requirements necessary to exclude home sale profits. This provision expires at the end of 2010 under current law.
• Give IRS the authority to treat gifts of thanks from states to veterans, such as payments of excess state revenue, as nontaxable gifts.

Two offsets would pay for these liberalizations. The first would make certain that individuals who relinquish their U.S. citizenship or long-term U.S. residency pay the same federal taxes for appreciation of assets, such as stocks or bonds, that they would pay if they sold them as U.S. citizens or residents. The second would extend a provision that allows the Social Security Administration to share earnings information so that accurate amounts of pension, dependency and indemnity compensation, hospice care, or unemployment compensation is paid to veterans and their families.

From RIA Checkpoint 6/15/07