Measure seeks to permanently correct military pay inequity

A bill introduced this week in the Senate would allow soldiers to treat combat pay, which is not taxed, as income eligible for valuable tax credits.

"When it comes to tax relief, our soldiers do not deserve to be penalized," said Sen. Mark Pryor, D-Ark.

The bill (S. 516) is a response to a Government Accountability Office report (GAO-04-721R) on military compensation and its tax treatment. Pryor, along with Sen. Max Baucus, D-Mont., and Senate Finance Committee Chairman Chuck Grassley, R-Iowa, requested the report in 2003.

GAO's analysis found that some military personnel at the lower end of the pay scale, many of whom served in Iraq and Afghanistan, suffered significant income losses because combat tax exclusions decreased their taxable incomes enough to exclude them from receiving other tax advantages, such as the Earned Income Tax Credit for low-income workers and the Child Tax Credit.

The analysis found that service members suffering from the net loss in tax benefits tend to be lower-grade enlisted or junior officers who spent seven months or more in combat zones during the tax year, are married with children and have little or no other income. Pryor said the tax glitch affects as many as 10,000 combat-zone soldiers, with penalties as high as $4,500 for officers and $3,200 for enlisted members.

GAO characterized the result as an "unintended consequence," penalizing soldiers serving in combat zones, and consequently benefiting higher-earning military members who become eligible for a tax credit that is normally targeted to low-income workers.

In 2004, Congress passed the Tax Relief for Americans in Combat Act, which enabled combat-serving military personnel to continue receiving their combat pay exclusions while having the ability to take full advantage of other tax credits. That legislation, however, only applied permanently to the child tax credit.

The earned income tax credit provision was set to expire in December 2006 but was extended for one more year. Pryor's new bill aims to make the provision permanent.

"This is make-or-break money for our soldiers and their families," Pryor said. "If we allowed this tax benefit to expire, we would have shortchanged the men and women serving heroically in combat who are not making much money, have families to provide for and have little or no savings."

Meanwhile, a separate 2004 measure addresses another problem associated with military members in filing their taxes. The Military Family Tax Relief Act gives military members serving outside the United States and Puerto Rico an extended deadline for filing. Those serving in a combat zone can postpone filing their taxes 180 days after their last day of combat service, under the law.

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