Memorial Day is a public holiday to honor and celebrate the sacrifices that men and women in the U.S. Armed Forces made in defense of our country. However, while these heroes paid the ultimate price and can be laid to rest, their families and survivors may continue to suffer financially for years to come. Fortunately, there is some tax relief available to eligible individuals who qualify under the Internal Revenue Code to get through these difficult times.
For an individual who dies while in active service as a member of the Armed Forces of the United States EITHER while serving in a “combat zone” OR as a result of wounds, disease or injury incurred while so serving:
- ANY income tax shall not apply with respect to the taxable year which he or she died, or with respect to any prior taxable year ending on or after the first day he or she began serving in a combat zone. 26 U.S.C. §692(a)(1).
- ANY tax for taxable years before death or combat zone service which is unpaid at the date of death (including interest, additions to tax and additional amounts) shall NOT be assessed, and if assessed it shall be abated, and if collected it shall be credited or refunded as an overpayment. 26 U.S.C. §692(a)(2).
The following rules apply to those individual seeking tax relief from death on active duty:
- “Combat zone” means any area which the President of the United States by Executive Order designates, for purposes of the Internal Revenue Code, as an area in which Armed Forces of the United States are or have engaged in combat. 26 U.S.C. §112(c)(2). Current “combat zones” include the Sinai Peninsula (since 2017), Afghanistan and certain surrounding countries (since September 19, 2001), Kosovo and certain surrounding countries (since March 24, 1999), and nearly the entire Arabian Peninsula including surrounding waterways and neighboring allied nations (since January 17, 1991).
- For individuals in “missing status”, the date of death is treated as the date that the person is determined to be deceased by the Department of Defense. The tax abatement for the year of death as determined for a missing individual does not apply to any taxable year beginning more than 2 years after the combat zone activities terminated (unless related to the Vietnam War). 26 U.S.C. §692(b).
For any individual who dies while on the job as a military or civilian employee of the United States (not necessarily on “active duty”) AS A RESULT OF a “terroristic or military action”:
- ANY income tax shall not apply with respect to the taxable year that he or she died. 26 U.S.C. §692(c)(1)(A).
- ANY income tax shall not apply with respect to any prior tax year in the period beginning with the taxable year in which the wounds or injuries were incurred leading to death. 26 U.S.C. §692(c)(1)(B).
The term “terroristic or military action” means:
- “Any terroristic activity which a preponderance of the evidence indicates was directed against the United States or any of its allies (26 U.S.C. §692(c)(2)(A))”; and
- “Any military action involving the Armed Forces of the United States and resulting from violence or aggression against the United States or any of its allies (or threat thereof)(26 U.S.C. §692(c)(2)(B))”. This DOES NOT include training exercises.
These tax breaks provided for military or civilian employees of the United States killed during military or terrorist actions also apply to astronauts killed in the line of duty or those not employed by the government that are killed during specified terrorist attacks (e.g. 9/11 attacks on New York and Washington D.C.). The exclusion of income taxes allows more wealth to pass to the taxpayer’s survivors from his of her estate that can truly use it. In addition, the surviving spouse can claim all of the itemized or standard deductions in a joint return with the deceased servicemember while wholly excluding the decedent’s income. After death, the IRS should be notified right away.
In addition, eligible survivor(s) of a qualified deceased servicemember may be eligible to receive a lump sum, 100% tax-exempt “death gratuity” payment of $100,000.00 from the Department of Defense. This one-time payment is intended to help the families and dependents of an Armed Forces member get through the difficult and immediate expenses that come following death. This “death gratuity” is immediately payable to the survivor(s) by the Department of Defense upon receiving official notice of death of any of the following:
- “A member of an armed force under his jurisdiction who dies while on active duty or while performing authorized travel to or from active duty.” 10 U.S.C. §1475(a)(1).
- “A Reserve of an armed force who dies while on inactive duty training (other than work or study in connection with a correspondence course of an armed force or attendance, in an inactive status, at an educational institution under the sponsorship of an armed force or the Public Health Service).” 10 U.S.C. §1475(a)(2).
- “Any Reserve of an armed force who, when authorized or required by an authority designated by the Secretary, assumed an obligation to perform active duty for training, or inactive duty training (other than work or study in connection with a correspondence course of an armed force or attendance, in an inactive status, at an educational institution, under the sponsorship of an armed force or the Public Health Service), and who dies while traveling directly to or from that active duty for training or inactive duty training or while staying at the Reserve’s residence, when so authorized by proper authority, during the period of such inactive duty training or between successive days of inactive duty training.” 10 U.S.C. §1475(a)(3).
- Any member of a reserve officers’ training corps who dies while performing annual training duty under orders for a period of more than 13 days, or while performing authorized travel to or from that annual training duty; or any applicant for membership in a reserve officers’ training corps who dies while attending field training or a practice cruise… or while performing authorized travel to or from the place where the training or cruise is conducted; or; or a graduate of a reserve officers’ training corps who has received a commission but has yet to receive a first duty assignment.” 10 U.S.C. §1475(a)(4).
- “A person who dies while traveling to or from or while at a place for final acceptance, or for entry upon active duty (other than for training), in an armed force, who has been ordered or directed to go to that place, and who has been provisionally accepted for that duty; or has been selected, under the Military Selective Service Act, for service in that armed force.” 10 U.S.C. §1475(a)(5).
- However, temporary members of the Coast Guard Reserve at the time of death are EXCLUDED. 10 U.S.C. §1475(b).
The servicemember may designate one or more persons to receive all or a portion of the death gratuity (up to ten people in increments of 10%). 10 U.S.C. §1477(a)(1). If there are no designated persons (or only a portion of the amount payable is designated), then the balance of the death gratuity is paid in the following order:
- “To the surviving spouse of the person, if any.” 10 U.S.C. §1477(b)(1).
- “If there is no surviving spouse, to any surviving children of the person and the descendants of any deceased children by representation.” 10 U.S.C. §1477(b)(2). Surviving children include adopted children, stepchildren residing in the decedent’s household at the time of death, and illegitimate children acknowledged or judicially determined to be offspring of the decedent. 10 U.S.C. §1477(d).
- “If there is none of the above, to the surviving parents of the person or the survivor of them.” 10 U.S.C. §1477(b)(3). Surviving parents include any fathers or mothers through adoption, but only one father and one mother may be recognized in any case. 10 U.S.C. §1477(c).
- “If there is none of the above, to the duly-appointed executor or administrator of the estate of the person.” 10 U.S.C. §1477(b)(4).
- “If there is none of the above, to other next of kin of the person entitled under the laws of domicile of the person at the time of the person’s death.” 10 U.S.C. §1477(b)(5).
OTHER MILITARY COMPENSATION PROGRAMS
Additional compensation may be available to eligible and qualified survivors of a deceased servicemember under the following programs:
- Survivor Benefit Plan (SBP), which include monthly annuity payments made by the Department of Defense. This is taxable income.
- Dependency and Indemnity Compensation (DIC), a monthly benefit paid by the Department of Veterans Affairs. DIC payments offset any SBP payment amounts that the survivor is entitled to. However, surviving spouses who have their SBP payments offset by DIC payments will be eligible to receive an additional Special Survivor Indemnity Allowance (SSIA) from the Department of Veterans Affairs. The SSIA is taxable income, but DIC payments are not.
- VA Survivor’s Pension (also called “Death Pension”) payable to qualified survivors of a deceased wartime veteran who served at least 24 months of active duty and at least 1 day in war combat. The Death Pension is tax-exempt income.
- Tricare medical coverage managed by the U.S. government, available to surviving spouses who have not remarried and surviving children until age 21.
- Basic Allowance for Housing (BAH) or Overseas Housing Allowance (OHA), which is housing compensation based on housing costs in the local market for servicemembers, may be available to the spouse and children of a deceased servicemember for one year following death (the servicemember must have been eligible for this benefit at the time or his or her death). These allowances are generally tax-exempt.
Survivors of a deceased servicemember who are struggling to realize these benefits or tax breaks from the federal government can use the help of a skilled lawyer to be successful. If you or a loved one have further questions about federal taxation or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.
Have a safe and healthy Memorial Day!