Financial Tips for Our Military Personnel

Dear Readers,
This week's column is addressed to those on active military duty, as well as those holding down the fort at home. There are some important rights and privileges you are entitled to that affect your wallet.

First, if you are in the reserves and have been called to active duty, you need to know that -- in most cases -- your civilian job is protected under the "Uniformed Services Employment and Reemployment Rights Act", or USERRA. This legislation, which was passed in 1994, prevents an employer from firing or otherwise discriminating against employees who leave their jobs because of military duty -- provided you report back to work within a certain number of days after your military service ends.

The length of time you have to apply to return to work depends upon how many days of active duty you served. If it was less than a month, you must apply the next day (but at least 8 hours) after you return to your home. The maximum is 90 days for those whose tour of duty lasts more than 6 months. While your employer can give you more time, it is not required to do so.

According to Martha Priddy Patterson, a director with Deloitte & Touche, USERRA gives you the right to get back your civilian job -- or a similar job-- "assuming it's still there." In other words, USERRA does not protect you if your position has been eliminated. For instance, if, in your absence, your company has layoffs or closes a plant, you cannot expect to walk back into a job that is no longer there.

In addition, USERRA protects your company-sponsored retirement plan. Employers who contribute to a profit-sharing plan on behalf of employees must contribute to your account when you return, based on the salary you would have received had you not been serving in the military. And you must get credit for vesting purposes, as well.

When you return to your civilian job, you get extra time to make up 401(k) or 403(b) contributions that you were unable to make because you were called to active duty. The length of time is either three times the duration of your military service or 5 years -- whichever is less. "If you're gone a year," says Patterson, "you've got three years to make up those contributions."

These "catch-up" contributions are over and above the regular annual limits on employee deferrals. For instance, for those under age 50, the maximum 401(k) or 403(b) contribution is $12,000 this year; next year it jumps to $13,000. However, if you were on active duty and could not contribute the full $12,000 for 2003, you can make up the difference next year and still contribute the normal $13,000 on top of that in 2004.

In addition, if your civilian employer offers a matching contribution, when you make your catch-up contributions, Patterson says your company "would have to provide the match you're eligible for."

USERRA also gives you the right to decide whether or not you want to accept the military's "Tricare" health insurance, or continue with the plan your employer provides. For instance, if you have a child or dependant with a chronic medical condition, switching your healthcare provider might necessitate changing doctors. You'll have to pick up the premiums if you decide to stay with your employer's plan. "But if it's important to your peace of mind, it might very well be worth it," according to Patterson. "The important thing to know is you've got a choice."

Although it's not pleasant to think about, it's a good idea to review who you named as the beneficiary on company benefits such as retirement plans and life insurance. As Patterson points out, "If you've gone through a divorce, you need to check to see if your beneficiary is still your ex-spouse."

Keep in mind that some employer-provided life insurance policies will not cover you if you die while in service to the military. In that case, you could be under-insured and you might want to take out a separate policy to provide adequate protection for your loved ones.

Whether you are full-time military or a reservist, if you are deployed in a combat zone, you do not have to pay income tax -- ever -- on the military pay you receive. "If you serve a single day in a combat zone, that entire month's income is tax-free," according to Mark Lyuscombe, principal tax analyst at CCH, a major provider of financial and tax information. The amount of income an officer can receive tax-free is capped at the highest level of enlisted pay, plus any additional "imminent danger" or "hostile fire" pay you're entitled to. Click on this link to get details about this and other special considerations for those serving in a combat zone.

You also qualify for this "exclusion" (as in, your income is excluded from having income tax levied on it) if you are serving in direct support of military operations in a combat zone. This would apply if, for example, you are stationed aboard an aircraft carrier from which jets take off to fly missions over Afghanistan.

For those serving in Afghanistan, "combat zone" includes the country as well as the airspace above it and covers military pay earned on or after Sept. 19, 2001. Other areas included in "Operation Enduring Freedom" are:

Pakistan, Tajikistan, & Jordan - Sept. 19, 2001

Incirlik Air Base, Turkey - Sept. 21, 2001

Kyrgyzstan & Uzbekistan - Oct. 1, 2001

Philippines - Jan. 9, 2002

Yemen - April 10, 2002

Djibouti- July 1, 2002

By the way, Iraq has been considered a combat zone for a decade -- ever since Operation Desert Storm under President George H.W. Bush.

Although military pay earned in a combat zone is federally tax-free, Luscombe points out that "investment income would still be taxed, as would income from a spouse's job." So you still have to file an income tax return. Be sure that the W-2 form you get from your service branch notes that you are entitled to an exclusion on all or part of your income.

Service in a war zone also automatically entitles you to an extension on the deadline for filing your income tax return. This is pushed back to 180 days (six months) after your tour of duty in the combat zone ends. This extension applies to your spouse and dependant children, as well. Furthermore, any interest or tax penalties you may be subject to are temporarily suspended.

Note: even if you were not sent to a war zone until 2003, you still get an extension on filing your 2002 tax return. The extension also applies to the deadline for contributing to your 2002 IRA.

This delayed tax filing deadline does not just include military personnel. In the words of the IRS, civilians "acting under the direction of the U.S. Armed Forces in support of those forces," are also entitled to the extension, as well as members of the Red Cross.

Finally, an estimated 400,000 more members of the military will potentially qualify for a back-door pay increase. That's because the Tax Act passed in 2001 changed the definition of "income" as it pertains to military personnel. Now, military benefits such as hazardous duty pay, housing supplement and subsistence supplement no longer have to be added to your regular pay to compute your taxable income.

If eliminating these items brings your total taxable income below $34,178 (or certain lower amounts depending on your tax filing status), you are entitled to the "Earned Income Tax Credit." This is a dollar-for-dollar reduction of your income tax bill. The IRS says one million military families could potentially qualify for this. (Exact figures are not known because it depends upon other sources of income, such as income earned by a working spouse.)

A great source of information on all tax issues pertaining to military personnel is the Internal Revenue Service Web site. Just type "Armed Forces" in the search box. You'll want to download or order by phone a copy of IRS Publication #3, the "Armed Forces Tax Guide." You can also access it directly by clicking on this link.

God bless America and our troops,



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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.