ARLINGTON, Va. — Because some of their earnings are tax-free, some deployed servicemembers might not be able to take advantage of the proposed increase in the Child Tax Credit, and Congress hopes to change that.
With combat pay, housing allowance and family separation pay being tax-exempt, some servicemembers’ taxable income might fall short of what is needed to claim the Cold Tax Credit — between $10,500 and $26,625 a year.
Both houses of Congress have passed a version of a bill that, in part, would exempt the tax-free pay for low- to middle-income military families. But the bills do not agree, and Congress is deadlocked and looking to the president to broker a truce.
In May, President Bush signed the $350 billion Jobs and Growth Tax Relief Reconciliation Act. But the increase the Child Tax Credit amount — from $600 per child to $1,000 for tax years 2003 and 2004 — did not make it out of Congress and into the final draft Bush signed.
So Congress is at it again. The Senate version deals solely with the Child Tax Credit issue. The measure would cost the government $10 billion, a cost that is offset by extending customs user fees.
The House version would cost $82 billion and included other provisions such as home sale relief, making the entire death gratuity tax-free, and included no means for paying for the measure, House and Senate aides said.
Currently, an estimated 200,000 servicemembers might not be able to take advantage of the $400 increase because some of their income, such as housing allowance, combat pay and family separation pay, is not taxed — a loophole that clearly benefits them but might keep them from taking advantage of the tax break in this case, officials said.
“But because they are not paying tax on that income, it doesn’t reach the floor of what families need to pay in taxes in order to receive the tax credit,” said Kathy Moakler, deputy director of government relations for the National Military Family Association, which represents the interests of members and families of active duty, reserve, and retired people.
“It’s a double-edged sword. If you are going to count nontaxable income for this, what about when the military families apply for other services? You don’t want [the nontaxable income] to count for free or reduced lunches, for example.”
Before breaking for the Fourth of July holiday, senators led by Olympia Snowe, R-Maine, and Sen. Blanche Lincoln, D-Ark., signed a letter to Bush, asking him to intervene in the stalemate. As of Monday, Snowe’s office had not heard of a White House resolution.
