Military Federal Income Tax Guide

Important Changes for 2003

Servicemembers Civil Relief Act. As a member of the Armed Forces, you may be able to defer (delay) payment of income tax that becomes due before or during your military service for up to 180 days after termination or release from service. For more information, see Not in a combat zone under Extension of Deadline.

Military Family Tax Relief Act of 2003. The Military Family Tax Relief Act of 2003 provides the following tax relief for members of the Armed Forces and their families.

• The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001, increased to $12,000 and is all nontaxable. Previously, the death gratuity was $6,000 and only $3,000 of it was nontaxable. So, you may be able to claim a refund if you paid tax on a death gratuity you received because of a death that occurred after September 10, 2001.
• The 5-year period used in determining whether you can exclude gain from the sale of your main home may be suspended during the period you or your spouse served on qualified official extended duty as a member of the Armed Forces. This change applies to any sale of a main home after May 6, 1997, so you may be able to claim a refund if you paid tax on a gain from a sale after that date. For details, see Sale of Home, later.
• A military base realignment and closure benefit generally is excludable from income if paid to you after November 11, 2003. See Moving allowances and Military base realignment and closure benefit, later.
• The extension of the deadline for filing a return for members of the Armed Forces serving in a combat zone now also applies to members of the Armed Forces serving in a contingency operation. See Extension of Deadline, later.
• Benefits received after 2002 under a dependent-care assistance program are nontaxable.
• Beginning in 2003, you may not have to pay the additional tax of 10% on the part of a distribution from a qualified tuition program (QTP) or a Coverdell education savings account (ESA) that is includible in gross income. You will not have to pay the additional tax if your distribution was made on account of the attendance of the designated beneficiary at one of the three military academies, the Coast Guard acad­emy, or the Merchant Marine academy, and the pay­ment or distribution does not exceed the costs of advanced education attributable to that attendance. For more information about Coverdell ESAs, see chapter 7 of Publication 970, Tax Benefits for Education. For more information about QTPs, see chapter 8 of Publication 970.
• As a member of a reserve component of the Armed Forces, you can deduct travel expenses for any period during which you are more than 100 miles away from home in connection with your reserve duties on line 33 of Form 1040, rather than as a miscellaneous itemized deduction on Schedule A (Form 1040). For more information, see Armed Forces Reservists under Adjustments to Income.

Lower income tax rates. For 2003, most tax rates have been reduced. The lower rates are reflected in the Tax Table and Tax Rate Schedules in your tax forms instructions.

Child tax credit. For 2003, the maximum child tax credit has been increased to $1,000 for each qualifying child. But you must reduce your credit by any advance payment you received in 2003. For more information, see Child Tax Credit under Credits, later.

Tax rates for capital gains and dividends. For capital gains after May 5, 2003, the 10% maximum capital gain rate is reduced to 5% and the 20% rate is reduced to 15%. For more information, see Capital Gain Tax Rates in Publication 550, Investment Income and Expenses.

For 2003, qualified dividend income is taxed at the new capital gain rates. See Qualified Dividend Income in Publication 550.

Standard mileage rate. The standard mileage rate for the cost of operating your car decreased to 36 cents a mile for all business miles driven. The standard mileage rate for operating your car to get medical care or to move de-creased to 12 cents a mile.

Earned income credit. The maximum amount of income you can earn and still claim the earned income credit has increased. You may be able to take the credit if you earned less than $33,692 ($34,692 for married filing jointly) if you have two or more qualifying children; $29,666 ($30,666 for married filing jointly) if you have one qualifying child; and, $11,230 ($12,230 for married filing jointly) if you do not have any qualifying children. See Earned Income Credit, later.

Exemption amount. You are allowed a $3,050 deduction for each exemption to which you are entitled.

Lifetime learning credit. The maximum lifetime learning credit has increased to $2,000 (20% of up to $10,000 of qualified tuition and related expenses). For details, see Publication 970.

Above information Courtesy of the Internal Revenue Service