Washington (Nov. 25, 2003) -- The Internal Revenue Service is helping taxpayers use a new law providing income exclusions for death benefit payments and certain home sales. Both provisions are retroactive, so some qualifying taxpayers must file amended returns to claim these tax breaks. The IRS asks them to put the words "Military Family Tax Relief Act" in red at the top of such returns to speed processing.

The new law doubled the benefit paid to survivors of deceased armed forces members to $12,000, made the entire amount tax-free and made the changes effective for deaths occurring after Sept. 10, 2001. Previously, only $3,000 was tax-free. Recipients who already paid tax on benefits received for deaths after the effective date should file an amended return on Form 1040X, reducing their adjusted gross income by the $3,000 they had reported as taxable. Those who receive such "gratuity" benefits in 2003 and future years will not have to report them on their tax returns.

Taxpayers may exclude gain on a home sale, provided they have owned and used the home as a principal residence for two of the five years before the sale. A reduced maximum exclusion may apply to those who satisfy part of the two-year rule. Military personnel often retain ownership of a home while away on duty but eventually sell it without returning to live in it, perhaps failing the use test completely.

The new law allows persons on qualified extended duty in the U.S. Armed Services or the Foreign Service to suspend this five-year test period for up to 10 years of such duty time. A taxpayer is on qualified extended duty when at a duty station that is at least 50 miles from the residence sold, or when residing under orders in government housing, for more than 90 days or for an indefinite period.

This change applies to home sales after May 6, 1997. A taxpayer may use this provision for only one property at a time and may exclude gain on only one home sale in any two-year period. Although an amended return must usually be filed within three years of the original return's due date, the law gives qualifying taxpayers who sold a home before 2001 until Nov. 10, 2004, to file an amended return claiming the exclusion.

-- WebCPA staff

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