Victims of Terrorism Tax Relief Act of 2001.

• Author: Packard, Pamela

On Jan. 23, 2002, President Bush signed into law the Victims of Terrorism Tax Relief Act of 2001 (the Act). This Act provides both income and estate tax benefits for covered individuals. The Act extends the benefits currently offered to military personnel and government employees who die as a result of combat or terrorism abroad to all covered terrorism victims. The Act also expands the type of benefits offered.

Although certain inconsistencies in the definition of "specified terrorist victims" exist in the income and estate tax provisions, individuals covered by the Act are those who died as a result of wounds or injuries suffered because of the terrorist attacks against the U.S. on April 19, 1995 (the Oklahoma City bombing) or Sept. 11, 2001 (including the attacks on the World Trade Center and the Pentagon, and the crash of United Airlines Flight number 93). The Act also extends relief to those who died as a result of illness from a terrorist attack involving anthrax, which occurred between Sept. 11, 2001-Jan. 1, 2002. The IRS issued Pub. 3920, Tax Relief for Victims of Terrorist Attacks, which gives guidance and detailed instructions on filing claims for relief.

Income Tax Relief

For specified terrorist victims (but not their spouses), the Act waives taxes for the year of death and for any prior tax year in the period beginning with the last tax year ending before the year in which the victim sustained wounds (new Sec. 692(d)(1)). Anyone who died in 2001 as a result of the terrorist attacks does not owe any taxes for the 2000 or 2001 tax years. Under this new provision, an income tax waiver may apply for more than the two years. For example, if injuries were sustained in 2001 due to a terrorist attack, but death did not occur from those injuries until 2002, tax relief would be available for 2000, 2001 and 2002. Taxpayers will have to file amended tax returns for the 2000 tax year or any affected year for which they have already filed returns.

Taxes will, however, continue to apply to certain income received by a specified terrorist victim. Deferred compensation that a victim would have received if he had died in some other manner would still be subject to tax. Additionally, if an action taken after Sept. 11, 2001 causes an acceleration of income (e.g., withdrawals from retirement plans and income received as a result of adjustments the decedent's employer made to a plan or arrangement that accelerated the vesting of restricted property)...