Lower-income military families get needed tax relief

Odd glitch in tax system eliminated.

Date published: 10/3/2004

CONGRESS HAS passed legislation to end a quirky reduction in tax breaks that hits lower-income military families when their service members are assigned to Iraq, Afghanistan or other combat areas.

Relief from the tax-break glitch was part of the Working Families Tax Relief Act of 2004 approved Sept. 23 and sent to the White House. It applies only to tax years 2004 and 2005 but it could be extended.

Last year up to 10,000 service members saw combat-zone tax exemptions lower their family income, for some by thousands of dollars. The combat-zone exemptions did so by lowering reportable income enough that families lost eligibility for the more valuable Earned Income Tax Credit.

Victims of this tax break "inversion," as a Defense official called it, typically are lower-grade enlisted members or junior officers who are married with children, serve at least seven months in a combat zone and have little or no other family income.

What they lose is a refundable credit for low-income workers approved in 1975 to offset the burden of Social Security taxes and to provide an incentive to work. Income thresholds to qualify for the earned-income credit vary by family size. For example, if workers have one qualifying child, taxable income must fall below $30,338 (or $31,338 filing jointly). But they also must have some taxable income.

Eligibility can mean refundable tax credits that put extra cash into pockets. The maximum credit in 2003 was $4,204 for a worker with two or more children, $2,547 with one child and $382 for a childless taxpayer. It's a more valuable tax benefit than a combat-zone exclusion for lower-income families who pay little or no taxes anyway. In combat areas, enlisted and warrant-officer income is tax-exempt. Officer earnings are too, but only the first $6,315.90 each month in 2004.

Sens. Mark Pryor, D-Ark., and Max Baucus, the ranking Democrat on the Senate Finance Committee, co-sponsored the original bill to protect earned-income-credit eligibility. Now part of the new tax law, it will allow members, if they choose, to have combat-zone income count toward eligibility.

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Date published: 10/3/2004