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Issue 38527

Publication 3 - Armed Forces’ Tax Guide (Pub 3)

Project Statement: Evaluate Publication 3 – Armed Forces’ Tax Guide Certificate. Determine the if Publication 3 – Armed Forces’ Tax Guide Certificate clearly communicate appropriate guidance to public.

Goal Statement: The goal of this project is to review and improve the Publication 3 – Armed Forces’ Tax Guide Certificate and make recommendations to the IRS that will enhance customer service and improve the taxpayer experience.

TAP RECOMMENDATION

ID 1392 Page 3, left column, Introduction Section

The current information concerning eligibility for military tax benefits is incomplete and incompatible with more complete and accurate information on the IRS website. The tax rules for members of the armed forces also apply to members of the uniformed services, which includes commissioned members of the Public Health Service and the National Oceanic and Atmospheric Administration.

See IRC sec. 7701(a)(15) and IRS website “eligibility for military tax benefits: https://www.irs.gov/individuals/military/eligibility-for-military-tax-benefits

IRS Action:Considered

ID 1392

Under consideration

We will add the NOAA but, for now, will keep our current terminology saying, “also can receive many of the same tax benefits.” Chief Counsel is considering this issue in light of IRC 7701(a) (15). While that section includes components of the uniformed services within the definition of armed forces, those uniformed services must be under the jurisdiction of the Secretary of one of the following: Defense, Army, Nary, or Air Force. Neither the Public Health Service nor the NOAA seem to fit into that category

From IRS Signoff Section Below: For ID 2 (ID 1392), we should have an answer by 11-09-2018.

Rebuttal:

Another applicable law is IRC sec. 140(b), which references 42 USC sec. 213, with respect to the commissioned officers of the Public Health Service.

 

Not Adopted (Rebuttal)

The text at the link you originally provided has been updated and no longer says PHS and NOAA gets the same benefits. Because all applicable laws providing tax benefits to members of the U.S. Armed Forces do not apply to members of the PHS or the NOAA, we can’t say they receive the same benefits. 42 USC 213 only gives PHS members privileges in very limited situations. While IRC 7701(a) (15) includes components of the uniformed services within the definition of armed forces, those uniformed services must be under the jurisdiction of the Secretary of one of the following: Defense, Army, Navy, or Air Force. Neither the Public Health Service nor the NOAA is currently under the jurisdiction of one of those Secretaries.

Page 4, Table 1. Items Included in Gross Income

TAP RECOMMENDATION

ID 1393 Page 3, left column, Introduction, What Isn’t covered in this publication Section

First, the reference to military pensions is technically incorrect. Retired members of the uniformed services receive retired pay, not pensions. Pensions are payable to veterans by the Department of Veterans Affairs. All payments from the Department of Veterans Affairs are exempt from federal income tax. More importantly, the tax rules for military retired pay, disability retired pay, and disability severance payments are unique and only apply to uniformed service members. They should be in this publication.

As a technical matter, reference to Pub. 910 should be deleted. This publication was last published in 2014 and is no longer identified as an available publication at: https://www.irs.gov/forms-pubs-search?search=910

IRS Action:Awaiting IRS response
TAP RECOMMENDATION

ID 1394 Page 4, Table 1. Items Included in Gross Income

  1. Basic pay is received while attending service academies (cadet
    pay/midshipman pay).
  2. The term “wages” does not appear anywhere in title 37, USC, Pay and Allowances of the Uniformed Services.
  3. CONUS COLA, authorized by 37 USC §403b, is an “allowance”, not a category of pay. See recommendation below.
  4. Retired pay (other than certain disability retired pay) is a form of
    taxable pay.
IRS Action:Partially adopted

ID 1394 Partially adopted.

(1) We will not change “Basic” to “Taxable.” The title to the table is Items Included in Gross Income. This already implies these items are taxable.
(2) We will move CONUS COLA.
(3) Except for moving CONUS COLA, we will not change the list. Once we move CONUS COLA, the list will look exactly like the one at https://www.military.com/money/personal-finance/taxes/military-taxes-figuring-gross-income.html

Rebuttal:

We disagree. The site you referenced belongs to private company. The list on the site does not provide an authoritative description of the various items of military compensation, pays, and allowances. In addition, its description of applicable tax rules is not correct. For example, as of 4/23/2019, it indicates the exclusion for the military death gratuity is limited to $3,000, when, in fact, the exclusion for the death gratuity is not limited to a specific dollar amount (See IRC Sec 134 (b) (3) (C).

Not adopted (Rebuttal)

We will not change “Basic” to “Taxable.” The title to the table is Items Included in Gross Income. This already implies these items are taxable. Also, basic pay includes more than just pay received while at the academy. Everyone in the military receives basic pay. See, for example, the definition of “basic pay” at https://militarypay.defense.gov/Pay/Basic-Pay/

TAP RECOMMENDATION

ID 1395 Table 1. Items Included in Gross Income

CONUS COLA, authorized by 37 USC §403b, is a taxable allowance, but not an item of “pay.”

IRS Action:Awaiting IRS response
TAP RECOMMENDATION

ID 1396 Table 1. Items Included in Gross Income

CONUS COLA, authorized by 37 USC §403b, is a taxable allowance, but not an item of “pay.”

IRS Action:Partially adopted

ID 1396 Under consideration.

While we might agree with you on this change, we will defer its consideration to TY2019 as it requires a massive change not only within this product but several of our other products such as those with an EIC computation, e.g., Pub. 721, etc.

Rebuttal: See below and attached cover letter

Partially adopted (Rebuttal)

This change would require numerous changes across numerous products. We do not have the resources to make this change. We will add verbiage to Pub 3 saying combat pay exclusion and combat pay compensation are the same as combat zone exclusion and combat zone compensation.

TAP RECOMMENDATION

ID 1397

As pointed out the Taxpayer Advocate in in her annual report MSP-13, Military Assistance, combat zone service entitled service members to contribute as much as $54,000 (for 2017) in a retirement account. “This important information is missing from the IRS website.”
https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/ARC17_Volume1_MSP_13_Military.pdf

See also TSP contribution information: https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html

IRS Action:Considered

ID 1396 Under consideration and non-adopted.

(1) The heading for this section is “Income Items of Special Interest.” Therefore, there would not be a discussion of contribution limits here. Contributions are the subject of Pub. 721, which is designed to provide details.
(2) We are looking into the issue regarding the $54,000. We will consider this in 2019.
(3) While we might agree with you on changing combat pay to combat zone tax exclusion, we will defer its consideration to TY2019 as it requires a massive change not only within this product but several of our other products such as those with an EIC computation, e.g., Pub. 721, etc.

Rebuttal to (3) Above: See below and attached cover letter

Partially adopted (Rebuttal to (3))

This change would require numerous changes across numerous products. We do not have the resources to make this change. We will add verbiage to Pub 3 saying combat pay exclusion and combat pay compensation are the same as combat zone exclusion and combat zone compensation.

 

TAP RECOMMENDATION

ID 1398

Change Combat Zone Pay to Compensation

IRS Action:Partially adopted

ID 1398 Under consideration.

While we might agree with you on this change, we will defer its consideration to TY2019 as it requires a massive change not only within this product but several of our other products such as those with an EIC computation, e.g., Pub. 721, etc.

Rebuttal: See below and attached cover letter

Partially adopted (Rebuttal) This change would require numerous changes across numerous products. We do not have the resources to make this change. We will add verbiage to Pub 3 saying combat pay exclusion and combat pay compensation are the same as combat zone exclusion and combat zone compensation.

TAP RECOMMENDATION

ID 1399 Items identified are payments of varying categories but not forms of “pay” under federal law (title 37, USC).

Exclusion Armed Forces Health Professions Scholarship is mentioned in Pub. 525, based on IRC sec. 117(c)(2)(B). Defense counsel services and uniforms provided to enlisted personnel are provided in kind, are not payments.

Pursuant to title 38, U.S.C. sec. 5301, benefits under laws administered by the Veterans Administration are exempt from taxation. See also IRC sec. 140(a)(3).

IRS Action:Awaiting IRS response
TAP RECOMMENDATION

ID 1400

Moved added defense counsel services and uniforms furnished to enlisted personnel from types on nontaxable payments to types of nontaxable in-kind benefits.

IRS Action:Awaiting IRS response
IRS Action:Partially adopted

ID 1401 Under consideration.

We have already discussed much of this in some detail in other portions of the pub. We would need to get clearance on further adjustment to our discussions of this notice in Pub 3.

From IRS Signoff Section Below:
For ID 11 (ID 1401), we should have an answer by 12-14-2018

Rebuttal: See below and attached cover letter

Partially adopted (Rebuttal)
We discussed the high points in some detail in 2018 Pub 3 on page 7 under How do I file a claim for a refund of an overpayment attributable to my disability severance pay.

TAP RECOMMENDATION

ID 1402

Information concerning a ‘rollover’ contribution of a military death gratuity and Service members’ Group Life Insurance (SGLI) payments to a Roth IRA appears in Pub. 590A, Contributions to Individual Retirement Arrangements (IRAs). It should also be provided in Pub. 3. The text being added is identical to the information in Pub. 590A (page 46).

IRS Action:Not adopted

ID 1402 Non-adopted.

We don’t cover beneficiary information in Pub 3. This addition would be changing the focus of the pub.

Rebuttal:

We disagree. Pub. 3 provides a great deal of information about forgiveness of income taxes for a service member who dies while serving in a combat zone or as a result of wounds, disease, or injury incurred in a combat zone. Guidance is provided to the personal representative of the deceased member, who is often the survivor of the deceased member. The information identified in this recommendation should be included in Pub. 3.

Not adopted (Rebuttal)

This change would require us to expand the scope of the publication. We are unable to do so at this time.

TAP RECOMMENDATION

ID 1403

Three federal laws have established three qualified hazardous duty areas (QHDAs). The existing text of Pub. 3 only identifies one. The recommended addition adds the two other QHDAs.

IRS Action:Not adopted

ID 1403 Non-adopted.

All these designations have terminated. For Bosnia and Herzegovina, Croatia, or Macedonia. see section 440103(B) in the Summary of Major Changes to DoD 7000.14-R, Volume 7 A, Chapter 44, Withholding of Income Tax, dated July 2009, at the top of page 44-5 available at https://comptroller.defense.gov/Portals/45/documents/fmr/archive/07aarch/07a_44_Jul09.pdf

For the Federal Republic of Yugoslavia (Serbia/Montenegro), see the Financial Management Regulation, DoD 7000.14-R, Volume 7A, Chapter 10, Figure 10-1, dated November 2016, available at https://comptroller.defense.gov/Portals/45/documents/fmr/current/07a/07a_10.pdf

Rebuttal:
We agree that entitlement for Hostile Fire/Imminent Danger pay ended for Bosnia and Herzegovina, Croatia, or Macedonia on 10/31/2007 and for Federal Republic of Yugoslavia (Serbia/ Montenegro) on 5/31/2014. However, the designation of these
areas as combat zone for income tax purposes has continuing applicability for several income tax purposes, including the forgiveness of income tax for members who die because of wounds, injuries or disease incurred while serving in those areas they were designated as combat zones.

Adopted (Rebuttal)
We agree. All the named zones were formerly part of Yugoslavia, and “Former Yugoslavia –KIA” is still listed as a site for forgiveness of taxes on page 23 of 2018 Pub 3 under Step 2: Properly identify the return. Montenegro and Serbia were
never removed. They have been listed under The Kosovo area. See page 14 of 2018 Pub 3. As for the other zones, we agree that,
while combat pay for these zones has terminated, retaining these other zones on the list of combat zones is useful in determining forgiveness of taxes of members who die because of injury in the named zone.

TAP RECOMMENDATION

ID 1404

Text from Pub. 525

IRS Action:Awaiting IRS response
TAP RECOMMENDATION

ID 1405

The Tax Cut and Jobs Act (P.L. 115-97, sec. 11045(a)) amended IRC sec. 67 by adding subsection (g), which suspended deductions for miscellaneous itemized deductions for taxable years 2018 through 2025.

IRS Action:Awaiting IRS response
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