Senate Democrats

H.R. 6081, the Heroes Earnings Assistance and Relief Tax Act of 2008

Summary and Background

The Heroes Earnings Assistance and Relief Tax Act of 2008 (The “HEART Act“) (H.R. 6081) is bipartisan legislation that would provide tax relief to the men and women in our nation’s armed services and others volunteering service on behalf of the United States, including Peace Corps volunteers and AmeriCorps volunteers. The legislation reflects our country’s gratitude for the outstanding and selfless service of America’s servicemembers and other volunteers, who make sacrifices in order to meet the needs of their country and fellow citizens. H.R.6081 would, among other things, guarantee that thousands of active duty military families qualify for the economic stimulus payments that the Democratic Congress approved earlier this year, and enhance their ability to receive other tax benefits that they deserve. The Senate is expected to consider the HEART Act during the week of May 19, 2008.

This Legislative Bulletin provides a description of major provisions, anticipated amendments, legislative history, the Statement of Administration Policy, and links to related reading resources.

Major Provisions

Tax Relief for Military Families

The HEART Act would:

  • Enable active duty military personnel to qualify for economic stimulus payments. The HEART Act would clarify that active military who file a joint tax return would be eligible for the stimulus rebate payment even if the spouse does not have a Social Security number;
  • Make permanent the ability to include combat pay as earned income for purposes of the Earned Income Tax Credit. The earned income tax credit (EITC) is a refundable tax credit for eligible low-income workers.  Generally, “earned income” includes taxable wages, salaries, tips, and other employee compensation.  Some low-income military families who receive the EITC based on taxable military pay could lose this tax credit if they begin receiving non-taxable combat pay and have no other earned income on which to claim the EITC.  The HEART Act would extend the provision that allows America’s military men and women to count combat pay for the purposes of qualifying for the earned income tax credit.
  • Make permanent and modify qualified mortgage bonds used to finance residences for veterans. To give our nation’s brave veterans greater access to homeownership, the HEART Act would permanently extend the provision that allows veterans to qualify for state-operated, tax-exempt mortgage revenue bond programs. This program provides financing to provide lower-income individuals without regard to the general first-time home buyer requirement;
  • Modify retirement plan protections for reservists who have given their lives in service or who are disabled while serving our country. The HEART Act would modifythe Uniformed Services Employment and Re-employment Rights Act to: 1) allow the day prior to the date of death to be treated as the date the employee returned to work for purposes of triggering payment of benefits under a qualified plan; and 2) permit an employer to make certain contributions to a qualified pension plan on behalf of an employee who is killed or becomes disabled in combat;
  • Modify treatment of differential wages paid by an employer to an employee who becomes active duty military. In the case of an employee who is called to active duty with the United States uniformed services, some employers voluntarily agree to continue paying the level of compensation that the service member would otherwise have received from the employer during the service member’s period of active duty. This “differential pay” is not treated as wages for purposes of the federal income tax withholding rules that apply to an employer’s payment of wages. The HEART Act would treat differential wages paid by an employer to an employee who becomes active duty military as wages for withholding and retirement plan purposes;
  • Extend the period for filing tax refund credit claims arising from Department of Veterans Affairs (DVA) disability determinations. Because of the lapse of time between retirement and the determination of, or the onset and determination of, a service connected disability, the HEART ACT wouldextend the statute of limitations to permit retired military personnel to file claims for refunds one year after the date of the determination of a service-connected disability is made;
  • Make permanent the special rules that permit penalty-free withdrawals from retirement plans. Generally, there is a ten percent withdrawal tax on early distributions from certain retirement plans.  Because reservists called to active duty may need access to amounts that they have contributed to their retirement plans in order to meet their personal financial obligations while serving our country, the HEART Act would extend special rules that permit active duty reservists to make penalty-free withdrawals from their retirement plans, and a reservist has two-years from the last day of the active duty period to contribute distributions to an IRA;
  • Permit recipients of military death benefit gratuities to roll over the amounts received to tax-favored accounts for retirement and education savings. To enablesurvivors of servicemembers should be able to contribute death benefit proceeds to accounts to save for future retirement and education needs, the HEART Act would permit recipients of military death benefit gratuities to roll over the amounts received, tax-free, to a Roth IRA or an Education Savings Account; and
  • Provide a tax credit for small employers with respect to differential wage payments to employees who are on active military duty. Many employers voluntarily eliminate any pay gap between the reservists’ civilian pay and military pay by paying the difference. The proposal would treat the pay gap as wages requiring information reporting and subject the differential pay payments to withholding. The proposal would also make it easier for employers to contribute to their activated employee’s retirement plans.

The HEART Act would also permanently allow the Social Security Administration to disclose tax return information to the DVA for purposes of determining eligibility for certain veteran’s programs; clarify that certain tax rebates and benefits are excludible from income for volunteer firefighters; clarify the application of the "five-year requirement" to the sale of a principal residence by a Peace Corps volunteer; clarify that state payments to service members are treated as qualified military benefits; and provide for permanent exclusion of gain from the sale of a principal residence by certain employees of the intelligence community.

Supplemental Social Security Income

To ensure fairer treatment of military families who depend on Supplemental Security Income payments, the HEART Act would:

  • Allow most military cash allowances beyond basic pay to be treated as earned income for purposes of determining Supplemental Security Income (SSI) eligibility and benefit amounts for military families, and treat certain housing payments as in-kind support and maintenance;
  • Disregard state annuity payments paid to blind, disabled, and aged veterans when determining SSI eligibility and benefits; and
  • Disregard allowances paid to all Americorps volunteers for the purpose of determining SSI eligibility and benefit amounts.

Revenue Provisions

The HEART Actwould:

  • Revise tax rules on expatriation. American citizens and long-term U.S. residents are subject to tax on their worldwide income. Under current law, taxpayers can avoid taxes by renouncing their citizenship or terminating their residence. The Heart Act would tighten current law rules to ensure that certain high net-worth taxpayers cannot renounce their citizenship or terminate their residence in order to avoid U.S. taxes. Under this provision, high net-worth individuals would be treated as if they sold all of their property for its fair market value on the day before such individual expatriates or their residency would be terminated. Thegain would be recognized to the extent that the aggregate gain recognized exceeds $600,000 (which will be adjusted for cost of living in the future).
  • Modify treatment of certain foreign persons performing services under contract with United States. The Heart Act generally would treat foreign subsidiaries of American companies performing services under a U.S. government contract as American employers for employment tax purposes. The domestic parent would be jointly liable for employment taxes imposed on the foreign subsidiary.
  • Increase general failure to file return penalty. The Heart Act would increase the general penalty for failure to file tax returns to the lesser of $135 or 100 percent of the amount required to be shown on such return.

Mental Health Parity

The HEART Actwould extend current law excise tax for failure to comply with the mental health parity requirements for benefits for services furnished on or after the date of enactment through December 31, 2008. Current law requires certain group health plans to provide the same coverage for mental health benefits that they provide for medical and surgical health benefits.  The HEART Act would extend the imposition of a $100-per-day excise tax on group health plans that fail to comply with this requirement.

Legislative History

On May 16, 2008, Representative Charles Rangel and 22 co-sponsors introduced H.R. 6081. It was passed unanimously by the House of Representatives by a 403-0 vote under suspension of the rules (Roll no. 331).

The House and Senate have previously passed legislation (H.R.3997) containing earlier versions of many of the provisions contained in H.R.6081.

The Senate is expected to consider H.R. 6081 during the week of May 19, 2008.

Possible Amendments

The DPC will distribute information on amendments as it becomes available.

Statement of Administration Policy

At the time of publication, the Administration had not released a Statement of Administration Position (SAP) on H.R.6081.

Related Reading

Joint Committee on Taxation, Estimated Budget Effects of H.R.6081, The "Heroes Earnings Assistance and Relief Tax Act of 2008," available here.