Heart act tax changes
In 2008, President George W signed. Bush the Heroes Income Assistance and Relief Act (HEART), which provided many financial benefits to U.S. service members and their families as another means of saying thank you. and compensate them for their service in the ongoing war on terrorism. The HEART Act contains several provisions designed to allow service members and reservists to make a smooth financial transition both to active duty and back to their civilian lives. Military families should take care to familiarize themselves with the provisions of this bill, as it offers a wealth of benefits to those who qualify.
Roth IRA / Coverdell ESA contribution limit One of the most important provisions of the HEART Act affects retirement and education savings amounts. Beneficiaries of service members killed in the line of duty are generally eligible for two forms of compensation. One of these is the death benefit from Servicemembers' Group Life Insurance (SGLI), which automatically pays to the beneficiary of each deceased Servicemember an amount not to exceed 400.000 US dollars paid. The other is a military death benefit that pays $100,000 (also automatic). The HEART Act allows (but does not require) beneficiaries to combine both amounts and transfer them directly to a traditional IRA, Roth IRA, or Coverdell education savings account. These contributions are allowed above the standard amounts that can be contributed to them.
A total of $500, 000 can be made to a Roth contribution and then withdrawn tax-free by beneficiaries in retirement or used to pay higher education expenses. This effectively represents the largest single tax break for retirement contributions in the entire code for anyone under any circumstances. A widow who receives this amount at age 40 and allows it to grow at 5% within 20 years in a Roth IRA will have more than $1 million in tax-free money in retirement.
Other tax benefits The provisions of the HERZ Act also extend to several other areas of employer-based compensation and tax savings for service members. Some of the provisions include:
1. Required payment of supplemental benefits from qualified and certain other types of retirement plans offered by employers. Employers must treat a deceased employee who was called to active duty and is killed because he resumed employment with them before his death. This allows the beneficiary/employee of the beneficiary to receive benefits such as accelerated vesting and supplemental life insurance payouts in the same manner as would be the case for a deceased civilian employee who had been continuously employed at the same job.
2. Penalty-free distribution from all qualified retirement plans and 403(b) plans and 457 plans. However, the servicemember employee cannot make additional elective contributions to the plan for six months after the date of distribution.
3. Permanent, penalty-free status of all qualified plan distributions filled by active reservists serving for more than 179 days. In this case, reservists are also allowed to contribute these amounts back at a later date under certain conditions.
4. Differential pay (the difference between an employee's military pay and civilian pay) is now classified as W-2 income instead of 1099 income, which means it counts toward the amounts that employee-service members can contribute to their retirement plans.
5. Tax-free distributions from all types of flexible spending plans to pay for health care expenses for qualified reservists called to active duty.
6. Tax-exempt status for any bonuses paid by states or other political bodies to provide members for their service-connected activities.
7. Permanently designating the tax-free combat zone as earned income eligible for the earned income credit.
8. Makes the first-time homebuyer exemption permanent for veterans who use mortgage bonds to purchase their residence.
9. Grants tax-exempt status for certain state and local payments to service members who are also volunteer firefighters or rescue workers.
10. AmeriCorps participants who receive cash or other benefits will not include that income when calculating their SSI eligibility and benefits.
The Bottom Line The various provisions of the HEART Act have been implemented in stages. Some took effect retroactively to 2007, while other parts of the law did not take effect until 2009. However, all provisions of this Act still apply today to eligible veterans and auxiliary personnel and their family members. For more information on the HEART Act, contact your financial advisor or a family support center.