The HERO Act: Opening Doors To Saving For Retirement
By Sylvia Cannon
Winter 2006-07
Military personnel and their spouses are able to set more of their income aside for retirement this tax season, thanks to legislation signed by President Bush this summer.
The Heroes Earned Retirement Opportunities (HERO) Act, which became law on Memorial Day 2006, allows members of the U.S. armed services and their family members to make Individual Retirement Account (IRA) contributions that weren’t allowed before the new legislation.
The change applies to pay earned by personnel serving in combat zones – areas designated by the president to be at risk of hostile fire or imminent danger, such as Afghanistan or Iraq.
Income earned by military personnel in combat zones is not subject to federal income tax and, before the new legislation was signed this summer, was not available for retirement savings.
The HERO Act protects non-taxed earnings for military personnel by making those wages available for retirement fund contributions. The allocation can be made to a traditional or Roth IRA, and the federal government-sponsored Thrift Savings Plan (TSP) also is available to service members who want to start saving outside of an individual retirement account.
Outside of combat zones, the HERO Act also makes income for military service in support of the president-declared areas available to retirement savers.
The HERO Act is retroactive for two years, so anyone who has served in a combat zone since 2004 can make retirement savings account contributions that previously weren’t allowed. Because taxpayers have three years to file amended returns, servicemembers have until May 29, 2009 to take advantage of the new law by making retroactive contributions.
The contribution limit in 2004 was the lesser of $3,000 ($3,500 if the servicemember was 50 or older) or the individual’s total taxable income for the year. The limit in 2005 was raised to $4,000 in 2005 ($4,500 for personnel 50 or older) or the individual’s total taxable income for the year.
All combat zone income is tax exempt for enlisted servicemembers. For officers, there is a limit.
Know What’s Available To You
Besides taking advantage of the HERO Act, servicemembers also have other issues to keep in mind as the 2007 tax season approaches.
In general, all income earned outside of president-declared combat zones must be reported to the Internal Revenue Service. This includes basic pay for active duty, attendance at a designated service school, back wages, drills, reserve training and training duty. It also includes special pay for aviation career incentives and diving duty, as well as wages paid to medical and dental officers, nuclear-qualified officers or any special-duty assignment pay. Additionally, enlistment and re-enlistment bonuses and accrued leave must be reported.
Income for foreign duty or service in areas where hostile fire or imminent danger is a risk also is taxable if the pay was not earned in a president-declared combat zone.
It’s important for servicemembers to figure their combat zone income because the result could reduce tax liabilities or even trigger a refund. Combat zone income also may be included in the Child Tax Credit and Earned Income Tax Credit calculations. The credits can mitigate a service member’s tax obligation.
If a servicemember is in a state only for active military duty, the state cannot assess state income tax on that person’s wages. In addition, a state can’t increase the tax liability of a servicemember’s spouse when calculating the couple’s state tax obligation. Both provisions can mean smaller tax bills from the IRS.
Reservists also need to begin thinking about tax time. Travel expenses to fulfill military responsibilities are deductible if the travel is more than 100 miles from the reservist’s primary residence.
Other exclusions could come into play, too. The military’s Basic Allowance for Housing is tax-exempt, for instance, and servicemembers also are allowed to deduct mortgage interest and real estate tax if they are homeowners, even if they also receive an allowance.
Travel allowances, family allowances and death allowances granted to military personnel also do not need to be reported to the IRS. Simple telephone calls placed to the United States by military personnel from a combat zone are tax exempt, too.
Get Ready Before Tax Season
Organizing paperwork can be tedious and challenging, but it also can be the key to saving money this tax season.
Each servicemember should set a goal now to gather all essential documents and financial records before choosing how to prepare his or her tax return. Important documentation includes the service member’s 2006 W-2s, receipts for deductible expenses and charitable gifts, as well as tax forms from 2005.
Besides being ready for a potential audit, keeping past tax return information can speed the tax preparation process and improve accuracy. If a tax preparer finds an error from your past three years’ returns, it also may result in additional money.
Most federal and state tax forms are available online, and “IRS Publication 3, Armed Forces Tax Guide” outlines tax rules that apply specifically to military personnel and is accessible at www.irs.gov.
Many servicemembers also qualify for filing extensions, especially if the person is serving in a combat zone, overseas or in a temporary location. For instance, personnel serving in a president-declared combat zone can take up to 180 days after leaving the area to file taxes or pay a tax bill.
If it doesn’t seem likely that a servicemember will qualify for an extension, a durable power of attorney provides for a designated person to complete the tax return as someone else’s representative.
Organization saves time, but there are other reasons why tax season can be complicated.
When someone’s life status changes, the government also may view his or her tax classification in a different light. Getting married, having or adopting a child, saving for college, paying for significant medical expenses or buying a house all affect how much taxpayers are required to pay. Investments also raise questions that may not have easy answers.
Complicated financial or life situations sometimes are best left to tax professionals who are trained to analyze each set of circumstances and find deductions or credits in order to reduce tax bills or boost refunds. Tax professionals also can explain, in easy-to-understand terms, the ways in which a refund can be provided to a servicemember.
Considering the amount of money that may be saved, enlisting the help of a trusted tax pro often pays for itself.
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Sylvia Cannon, a retired Air Force logistics officer and spouse of an active duty Army officer, has been an H&R Block office manager for six years. H&R Block’s 12,500 retail tax offices nationwide can assist service members with any tax or financial concerns. Call 1-800-HRBLOCK or visit www.hrblock.com to find the nearest location.
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Filing For The First Time?
Since you’ve started earning money, you will be responsible for paying taxes on that income. In fact, you began paying taxes with your very first paycheck.
This is where IRS Form W-4 form comes in. When you began your military service, you completed Form W-4, which included your statement about how much federal tax to withhold from your paycheck. The number of withholding allowances you entered on your W-4 will determine the amount of your tax refund or how much you'll owe the government every year.
When tax time comes around, if you did not have enough money withheld to pay for the tax you owe, you will be responsible for paying the remainder due. If you had too much withheld, you will receive a refund.
The withholding amount taken from your paycheck may not cover bonuses, benefits or other types of income. It is possible that you may still owe tax to the IRS even after you have paid in the withholdings from your paycheck.
Additionally, it may be a good idea to set aside money to pay your state or local taxes on your own.
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What Does Moving Mean For Your Taxes?
Even for taxpayers who have no plans to itemize their returns this tax season, a significant opportunity is available for servicemembers who have moved during the past year.
Anyone who has moved as part of military service to a new location that is at least 50 miles farther from his or her old home than the previous job qualifies to claim the expense as an adjustment to his or her income.
Expenses to move servicemembers and their belongings qualify for the deduction. For more information on deducting moving expenses, “IRS Publication 521, Moving Expenses” can help. Find it at to www.irs.gov.
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