Numerous tax provision exist specifically for the Military, well detailed in IRS Publication 3, Armed Forces Tax Guide. Considerations include the taxation of overseas combat zone pay, state residency taxation, travel and moving expenses, education expenses, childcare expenses, non-citizen spouses, sale of principal residences and tax forgiveness. Certain member of the Armed Forces have unique rights, as outlined by the Service Members Civil Relief Act.
Service Members Civil Relief Act
The Service Member’s Civil Relief Act (SCRA) provides a wide range of protections for individuals called to active duty and deployed, by postponing or suspend certain civil obligations. This law enables service members to devote full attention to their duties and relieve stress on their family members. Such obligations may include interest on credit card debt capped at 6%, deferrals of mortgage payments, stay of default judgements, suspension of tax obligations for 180 days and the prevention of evictions for lease expiration. The law serves to protect the rights of service members while attending to military duties.
In January of 2013 a bank regulatory settlement was reached with mortgage servicing banks regarding the unlawful foreclosure of active duty military. Many service members and their families have received income for up to $125,000 to compensate them for the unlawful taking of their homes. The banks failed to exercise care in determining if the homeowner was on active duty or in the military. This settlement may or may not be taxable, depending on the unique situation. Though it is reported on form 1099-Misc, the amount may be taxed at the lower capital gains rates. In addition, the gain may be excluded if it relates the taxpayers primary residence.
If you have received these funds and are curious about the taxation of your foreclosure settlement, contact our tax attorney office today.