Cameron Miranda
The Heroes Earnings Assistance and Relief Tax Act of 2008 (The HEART Act) provides tax and pension benefits to service members who are disabled while on active duty for more than 30 days and to their survivors if they die on active duty. The Act allows survivors to roll over their death gratuity and insurance payments into tax-advantaged accounts, such as Coverdell Education Savings Accounts (ESAs) and Roth IRAs. The HEART Act also impacts the tax treatment of differential wage payments made by employers to service members called to active duty, now treating these payments as wages for income tax withholding purposes.
| Characteristics | Values |
|---|---|
| Full Form | Heroes Earnings Assistance and Relief Tax Act |
| Year | 2008 |
| Purpose | Provide tax and pension benefits to service members who are disabled while on active duty for more than 30 days and to their survivors if they die on active duty |
| Tax Advantage | Allows survivors to roll over their death gratuity and insurance payments into tax-advantaged accounts |
| Death Gratuity and SGLI Payments | May be rolled over into a Roth IRA or CESA only if the contribution is made before the end of the 12-month period from when the beneficiary receives those payments |
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What You'll Learn
The Heroes Earnings Assistance and Relief Tax Act of 2008
The HEART Act offers tax and pension benefits to service members who become disabled while on active duty for over 30 days. It also provides benefits to the surviving family members of service members who die on active duty. These benefits include the ability to invest death gratuities and Servicemembers' Group Life Insurance (SGLI) payments into Roth IRAs and Coverdell Education Savings Accounts (CESAs) without the usual contribution limits. This allows funds to grow tax-free and be withdrawn at any time without penalty, up to the amount of the initial investment.
Additionally, the HEART Act amends the Internal Revenue Code to exempt certain state and local payments to volunteer firefighters and emergency medical responders from federal employment and unemployment taxes. It also treats cash remuneration paid to members of the uniformed services as earned income and certain housing payments as in-kind support for SSI program purposes.
The Act also makes permanent the exemption from the first-time homebuyer rule for veterans using mortgage revenue bonds to purchase a residence. It increases the issuance limits on these bonds for veterans in Alaska, Oregon, and Wisconsin to $100 million after 2009.
Furthermore, the HEART Act addresses the practice of US government contractors setting up shell companies in foreign jurisdictions to avoid payroll taxes. It amends the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of US companies performing services for the US government as American employers for Social Security and Medicare payroll tax purposes.
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Tax and pension benefits for service members
The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) provides tax and pension benefits to service members and their survivors. The Act ensures benefits for service members who are disabled while on active duty for over 30 days and their survivors if they die during active duty.
The HEART Act requires employers to treat service members as re-employed for entitlement purposes, including defined benefit and contribution plans, such as 403(b) and 457(b) education plans. This provision ensures that service members and their survivors receive benefits they might not have otherwise been entitled to.
One of the key benefits of the HEART Act is the ability to invest death gratuity and Servicemembers Group Life Insurance (SGLI) payments into Roth IRAs and Coverdell Education Savings Accounts (ESAs). These investments can grow tax-free, and withdrawals are permitted at any time without penalty, up to the amount initially invested. Additionally, distributions from Coverdell ESAs are generally tax-free when used for qualified education expenses.
The Act also addresses "differential wage payments," which are payments made by employers to service members during their period of active duty. Before the HEART Act, these payments were treated as self-employment income, and service members had to pay self-employment taxes. Now, these payments are treated as wages for income tax withholding purposes, allowing them to be contributed to the employer's qualified retirement plan while the service member is on active duty.
Furthermore, military disability retirement pay and veterans' benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income. Service members with service-connected disabilities may be eligible for federal income tax exclusions on these benefits. Additionally, in the state of Maryland, individuals receiving military retirement income can subtract up to $12,500 from their federal adjusted gross income, with an increase to $20,000 for those aged 55 and above.
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Survivor benefits
The Heroes Earnings Assistance and Relief Tax Act of 2008 (The HEART Act) provides tax and pension benefits to survivors of service members who die on active duty. Survivor benefits include the ability to invest death gratuities and Servicemembers Group Life Insurance (SGLI) payments into tax-advantaged accounts, such as Roth IRAs and Coverdell Education Savings Accounts (CESAs). This allows survivors to grow their funds tax-free and access them without penalties.
The HEART Act ensures that survivors can receive these benefits by requiring employers and sponsors of qualified defined benefit and contribution plans to treat service members as reemployed, thereby entitling survivors to benefits they may not have otherwise received. This includes "differential wage payments," which are now treated as wages for income tax withholding purposes, allowing them to be contributed to the employer's qualified retirement plan.
Death gratuity and SGLI payments can be rolled over into a Roth IRA or CESA, but only if the contribution is made within 12 months of the beneficiary receiving the payments. The amount contributed cannot exceed the total amount of the military death gratuity and SGLI payments received, reduced by any portion contributed to another tax-advantaged account.
Survivors can seek financial counselling from the Department of Veterans Affairs or Military OneSource financial counsellors to understand and take advantage of these benefits before they expire. These benefits help ensure the financial security of survivors by providing tax advantages and access to educational savings accounts.
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Exit tax for covered expatriates
The Heroes Earnings Assistance and Relief Tax (HEART) Act was signed into law by President Bush in 2008. It introduced the first US exit tax, which applies to US citizens or green card holders who are deemed covered expatriates when they renounce their citizenship or permanently leave the US for federal tax purposes.
The US exit tax applies to several different types of assets that may be owned by an expatriate, including specified tax-deferred accounts, eligible and ineligible deferred compensation, and all other types of assets. These assets are treated as if they were sold, and any unrealized gains are taxed. For example, if an individual bought a stock for $200,000 and it is worth $500,000 when they renounce their citizenship, the $300,000 gain is taxable.
To be considered a covered expatriate, an individual's net worth must exceed $2 million on the day they renounce their citizenship, including all assets valued at fair market value as if sold. Additionally, their average annual net income tax liability over the five tax years before expatriation must exceed a certain threshold, which is estimated at $208,000 for 2025.
It is important to note that individuals who fail to certify their compliance with US tax obligations for the past five years on Form 8854 will also be considered covered expatriates, regardless of their wealth or income. The IRS provides options for those who are behind on filings, such as the Streamlined Filing Compliance Procedures and the Voluntary Disclosure Program, to help catch up on any delinquent tax returns before renouncing their citizenship.
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Differential wage payments
The Heroes Earnings Assistance and Relief Tax Act of 2008 (The HEART Act) introduced a change in the treatment of "differential wage payments". Differential wage payments refer to the compensation paid to employees who are called to active duty for more than 30 days. This compensation is equivalent to the wages the employee would have earned during their period of active duty had they not been called to serve.
Prior to the HEART Act, these differential wage payments were not treated as wages for federal employment tax purposes. Instead, they were classified as self-employment income, and the recipients were required to pay self-employment taxes.
However, as of December 31, 2008, the HEART Act mandates that differential wage payments be treated as wages for income tax withholding purposes. This means that employers must include these payments as wages on Form W-2. The purpose of this change is to allow service members to contribute these payments to their employer's qualified retirement plan while they are on active duty.
Additionally, the HEART Act introduced a tax credit for employers who make differential wage payments. Eligible small business employers can claim a credit against their income tax liability, which is equivalent to 20% of the eligible differential wage payments made to qualified employees, up to a maximum of $4,000 per employee per taxable year. To be considered a qualified employee, the individual must have been employed for the 91-day period immediately preceding the period for which the differential wage payment is made.
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Frequently asked questions
The Heroes Earnings Assistance and Relief Tax Act of 2008 (The HEART Act) provides tax and pension benefits to service members and their survivors.
The Act provides benefits to service members who are disabled while on active duty for more than 30 days and to their survivors if they die on active duty. It also allows survivors to roll over their death gratuity and insurance payments into tax-advantaged accounts, such as Coverdell Education Savings Accounts (ESAs) and Roth IRAs.
The purpose of the HEART Act is to ensure that service members and their survivors receive benefits they may not otherwise be entitled to.
Prior to the HEART Act, differential wage payments made to employees called to active duty for more than 30 days were treated as self-employment income, with the employee paying self-employment taxes. The HEART Act changed this by requiring that such payments be treated as wages for income tax withholding purposes, allowing them to be contributed to the employer's qualified retirement plan.
