Military Officer - February 2007 - (Page 62)

1 2 62 MILITARY OFFICER H Heroes Earned Retirement Opportunity (HERO) Act Se Servicemembers in combat zones are allowed to treat nontaxable combat pay as earne earned income for purposes of contributing to an IRA under this act, signed into law May 29, 2006. Contributions to an IRA must come from “earned income,” and under the 2 previous rules tax-free combat pay was not considered earned income. This caused signiﬁcant tax problems for servicemembers with automatic investment programs — technically they should have stopped such programs while deployed or faced signiﬁcant tax penalties for improper IRA contributions. The HERO Act now allows deployed servicemembers to continue automatic investment programs, and this welcome change is retroactive to Dec. 31, 2003. Affected servicemembers (including recent retirees) have up to three years from the effective date of the HERO Act to make IRA contributions for the 2004 and 2005 tax years, allowing them to contribute up to $3,000 for 2004 and $4,000 for 2005 (plus an additional $500 for each year they were age 50 and older). Contributions can be to a Roth IRA, deductible traditional IRA, or spousal IRA. If a contribution affects the tax year in question (e.g., a contribution to a deductible traditional IRA), you have up to one year from the date of the contribution to ﬁle an amended tax return Form 1040X to claim any tax beneﬁt. Tax Tactic: If you can make these IRA contributions, this could be a great way to boost your retirement savings accounts. Plus, making deductible traditional IRA contributions is one of the few options for lowering your tax bill for previous years’ returns. Primary Residence “Use” Rules for Capital Gains Exemptions R Rules enacted in 2003 allow active duty servicemembers to suspend the two-out-of-ﬁve-years’ use enacte requirement to qualify for a capital gains exemption on the sale of a primary residence for up to 10 years, t provided a permanent-change-of-station move or extended temporary duty takes the servicemembers more than 50 miles from the residence. This means that an active duty servicemember technically could sell a home he or she has owned — but hasn’t lived in — for up to 15 years and still qualify for capital gains exemption. These rules can be tricky, so please consult IRS Publication 3 and IRS Publication 523 for details. Once you leave active duty, the two-out-of-ﬁve-years’ clock starts ticking again. Tax Tactic: If you own more than one property, check to see whether you qualify, because the rules’ change can mean as much as a $500,000 exemption for a married couple and up to $250,000 for a single ﬁler. FEBRUARY 2007

Table of Contents Feed for the Digital Edition of Military Officer - February 2007

Military Officer - February 2007 Contents From the Editor From the President Your Views MOAA Directory Rapid Fire Washington Scene Financial Forum Ask the Doctor Chapter Activities Cover Story: Building Stability Reaching Out, Reaching Up 5 Tax-Season Strategies A Capital Event MOAA Member Services Pages of History Information Exchange Advertising Index Member Books Sounding Taps MOAA Calendar Encore

Military Officer - February 2007

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