Military families, farmers and ranchers are just some of the recipients of tax breaks in two new federal laws: the Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act) and the Food, Conservation and Energy Act of 2008. Congress authorized more than $3 billion in tax breaks in these two laws. Meanwhile, billions more in other tax breaks are pending in Congress, so it is shaping up to be a big year for tax legislation.

Military tax relief

The military tax relief act includes roughly $1.2 billion in tax incentives, most of which are targeted to servicemen and women on active duty, reservists who are called to active duty and military families. Here are some of the highlights:

• Permanent extension of election to treat combat pay as earned income for the earned income credit
• Penalty-free withdrawals from 401(k)s and other retirement arrangements for individuals called to active duty
• Special rules for unused amounts in flexible spending arrangements (FSAs)
• Enhanced contributions of military death gratuities to tax-favored accounts
• State veterans bonuses and other payments treated as nontaxable gifts

The military tax relief act pays for these and other tax incentives by imposing new requirements on very wealthy individuals who renounce their U.S. citizenship for tax purposes. The new law also treats foreign subsidiaries of U.S. companies as American employers for purposes of Social Security and Medicare taxes, increases the failure to file a tax return penalty and extends a special mental health parity excise tax.

Military families and employers

Two incentives in the military tax relief act are especially important to military families and employers. The first one deals with the economic stimulus payments (also known as tax rebates) currently being issued by the IRS. The second incentive helps employers that have employees called up to active duty.

When Congress authorized economic stimulus payments earlier this year, it restricted them to recipients with valid Social Security numbers. The new law makes an exception for military families. As long as one spouse is a member of the U.S. Armed Forces and has a valid Social Security number, the IRS can issue an economic stimulus payment to the couple.

Many employers voluntarily pay the difference between a reservist's military pay and his or her regular pay when the individual is called to active duty. This is known as "differential pay." The new law gives small employers (generally employers with fewer than 50 employees) a temporary tax credit (20 percent of the differential pay with a $4,000 cap). Additionally, the new law treats differential pay as wages rather than benefits.

Farm bill

The tax incentives in the farm act are just one part of a huge ($300 billion) new law. Among the highlights are:

• Enhanced charitable contributions of real property for conservation purposes
• New forestry conservation bonds
• Tax credit for safely securing pesticides and fertilizers
• Enhanced like-kind exchanges of water rights in the form of mutual ditch, reservoir irrigation stock
• Tax credit for cellulosic biofuels

Congress voted to pay for these and other tax incentives in the farm bill by limiting the amount of farming losses that a taxpayer receiving certain subsidies may use to offset non-farming business income. The farm bill also conditionally reduces the ethanol tax credit.

Extenders and more tax bills

If you took the higher education tuition deduction, state and local sales tax deduction or one of many other popular tax breaks in the past, you may be surprised that some have expired or will soon expire. That's why they are called "extenders." Congress keeps extending them after they expire.

Just before Memorial Day, the House voted to extend a host of temporary tax breaks, including the:

• State and local sales tax deduction
• Higher education tuition deduction
• Research tax credit
• Teachers' classroom expense deduction
• New Markets Tax Credit
• Fifteen-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant property

Similar legislation has also been proposed in the Senate.  We're also watching for a possible tax break for first-time homebuyers, extended energy tax breaks and scholarships for veterans, which could be paid for by a surtax on wealthy individuals. The House has approved these measures but their fate is uncertain in the Senate.

If you have any questions about the tax incentives in the military and farm acts, please contact Wipfli. We'll be glad to discuss them in more detail and explore how you might be able to take advantage of them.

The information in this article is of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact Wipfli for more information on this subject and how it pertains to your specific tax or financial situation.