Tax planning for armed forces personnel.

• Author: Garrison, Larry R.
• Position: Part 2

EXECUTIVE SUMMARY

* Tax liability forgiveness is available for MAFs in a variety of circumstances.

* For a deceased MAF who filed jointly, the amount of tax liability forgiven is determined by use of a formula.

* A MAF may qualify for an automatic extension to file and pay until June 15 without filing Form 4868.

Clients serving in the U.S. Armed Forces are subject to many special rules that may provide tax savings opportunities. Part II of this two-part article examines forgiveness of tax liability, filing requirements and extensions and recent developments.

U.S. Armed Forces personnel are subject to many special rules that may provide tax savings opportunities. Part I of this two-part article, in the last issue, examined income inclusions and exclusions, the special exclusion for combat zone duty, various adjustments to income, dependency exemptions and itemized deductions. Part II, below, analyzes forgiveness of tax liability, filing requirements, extensions and recent developments.

Forgiveness of Tax Liability

Combat Zone

Under Sec. 692(a)(1)and Regs. Sec. 1.692-1(a), if a U.S. Armed Forces member (MAD dies while in active service in a combat zone (as determined under Sec. 112) or from wounds, disease or other injury received there, his income tax liability is forgiven for the tax year in which death occurred and for any earlier tax year ending on or after the first day he served in a combat zone in active service. According to Sec. 692(a)(2),if the forgiven tax liability has been previously paid, the tax is credited or refunded. Unpaid taxes from prior years are forgiven; prior years' taxes paid after the date of death (DD) are credited or refunded. A reduction in estate taxes under Sec. 2201 is also available for MAFs dying under the above circumstances.

For MAFs serving outside a combat zone, tax liability is forgiven under Sec. 692(c) and Regs. Sec. 1.112-1(e)(1) if the service was (1) in direct support of military operations in a combat zone and (2) qualified for special military pay for duty subject to hostile fire or imminent danger.

Sec. 692(b) provides that the DD for a MAF in a missing status (as defined in Sec. 6013(f)(3)(A), either as missing in action or as a prisoner of war) is the date the MAF's name was removed from missing status for military pay purposes, regardless of the actual DD.

Terroristic or Military Action

Tax liability forgiveness is also available under Sec. 692(c)(1) for a taxpayer who (1) was a military or civilian U.S. employee on the DD and (2) died from wounds or injuries incurred while a U.S. employee in a terroristic or military action outside the U.S. This rule applies to the tax year in which the individual died and to any earlier tax year beginning with the year before the one in which the wounds or injuries occurred.

A "terroristic or military action" is defined by Sec. 692(c)(2) as any (1) terroristic activity outside the U.S. directed against it or its allies or (2) military action outside the U.S. involving the U.S. Armed Forces resulting from violence or aggression against the U.S. or its allies. A U.S. "ally" includes any multinational force in which the U.S. is a participating member, according to Sec. 692(c)(3).

Claiming Tax Forgiveness

Rev. Proc. 85-35(16) should be followed to claim tax forgiveness for MAFs who have died in a combat zone or as a result of terroristic or military action outside the U.S. Form 1040 needs to be fried if a tax return has not been filed for the tax year. If a tax return has been fried, a claim for refund on Form 1040X, Amended U.S. Individual Income Tax Return, should be filed for each year subject to forgiveness. The appropriate returns are sent to: Internal Revenue Service Center, P.O. Box 267, Covington, KY 41019, Attn: Stop 2.

A statement should be attached to the return that includes a...