I have been writing about business formations, but in light of recent news of some of my friends having close calls with death, I wanted to write about some of the issues, which might come up, if a servicemember dies in the line of duty. There are only two things in life certain – Death and Taxes. Today, I will discuss both.
Before I go on, I want to discuss timing (the elephant in the room). We are currently in a draw down with the war in Afghanistan and our presence in Iraq is minor, (but increasing due to the resurgence of the ISIS; however, the purpose of this post is not to debate foreign policy). That said, remember the IRS allows amendments of tax returns up to 3 years after the filing date, the due date (normally April 15) or 2 years after the tax is paid, whichever is later, and in some cases even further in the past. If you know someone who has had a family member pass away in a combat zone within the past three years, this article might apply to them and they need to contact their attorney, CPA or EA about their options.
Society, through the actions of the federal government, attempts to show its gratitude to members of the armed forces, who die in the line of duty in an active combat zone, through forgiveness of taxes owed on the income received by that servicemember:
With respect to the taxable year in which falls the date of his [or her] death, or with respect to any prior taxable year ending on or after the first day he [or she] so served in a combat zone after June 24th, 1950; and (§692(a)(1))
Any tax under this subtitle and under the corresponding provisions of prior revenue laws for taxable years preceding those specified in paragraph (1) which is unpaid at the date of his [or her] death (including interest, additions to the tax, and additional amounts) shall not be assessed, and if assessed the assessment shall be abated, and if collected shall be credited or refunded as an overpayment. (§692(a)(2)
What the above means in English is that under certain conditions, tax paid on military pay to a servicemember who dies in a combat zone (or any terroristic activity) shall not owe taxes! As I read both the section of the law (§692) and the regulation dealing with this section (§1.692-1), the amount of tax forgiveness starts the year in which you arrive in the country, but it is only attributable to the amount paid to the servicemember, and not any additional income (rental properties, partnership income, investment income, etc.) to INCLUDE spousal income.
It is this last line, which needs focus. The income a spouse receives from his or her employment, while the servicemember is stationed in the combat zone, is NOT excludable from income taxes under these rules, nor is the income received in the year of death of the servicemember. In fact, the regulations deal with how the amount of the exclusion is to be calculated; this can get convoluted. It is recommended that you consult with your attorney, CPA or EA, if you think that you may qualify for relief under this condition.
Hospitalization of Servicemembers in a Combat Zone
Many people might know about the exclusion of income while serving in a combat zone, but I remember when I was in the US Navy: Live by the Gouge, Die by the Gouge; therefore, I am going to put some black and white on this. §112 of the tax code deals with combat pay exclusions. It is known, if you serve in a combat zone, you will qualify for a combat exclusion, if you meet the conditions under §112. This is great if you are healthy, but what if you get sick after eating some really bad food and you are sent to Europe for further observation for two months. Did you bust your exclusion?
Section (c) of §1-112 deals with hospitalizations and according to the regulations, “if an individual is hospitalized for wound, disease, or injury while serving in a combat zone, the wound disease or injury will be presumed to have been incurred while serving in a combat zone, unless the contrary clearly appears.” So the answer appears to be “no” you did not bust your exclusion and the pay while in the hospital is excluded.
Six Days Before Retirement
Remember the line in the movies, where the guy gets shot, he says “And only six days before retirement!” and then he died. All of us can sympathize for that, because we all have dealt with Murphy’s Law. Turning to a more serious note, imagine you are on patrol one week before the end of combat operations in Afghanistan and you are injured. The IRS regulations will continue to provide relief under §1.112-1(c).
Agent Orange-like Cases
What happens if a servicemember comes back from the combat zone and experiences symptoms of a disease and is hospitalized (while on active duty). If the disease is determined to be contracted in a combat zone (where the incubation period is showed to put the exposure in the combat zone) and hospitalization occurs, the pay is excludable under §112, but only pay, which is servicemember’s pay and excludable under §112. However, the exclusion is only if the hospitalization for the disease occurs within 2 years of termination of the combat zone status.
The best case for the above exclusion, which I can think of, would be exposure to Agent Orange, where the onset of the disease was years after exposure. It would be likely symptoms would appear after returning home. An interesting point on this is the Vietnam War was specially excluded under §1.112-1(a)(2) and the two year limit, as listed above, does not apply. But as there are likely no active duty people who served in Vietnam in the military at this time, this use of this code for Vietnam serving active duty servicemembers might be limited.