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FINANCIAL PLANNING TAX TACTICS
If a member of the United States armed forces dies while in active service and the death occurs:
* While serving in a combat zone;
* Outside a combat zone while performing duties in direct support of military operations in the combat zone, and while qualifying for hostile fire pay; and,
* At any place as a result of wounds, disease or injury incurred while serving in the combat zone or in support of military operations in the zone, their federal income tax liability is canceled for the tax year in which they died and for any earlier tax year ending on or after the first day of service in a combat zone.
Income tax relief for victims of terrorism. The Victims of Terrorist Tax Relief Act of 2001 provides income tax relief for any individual who died (or later dies) either:
* As a result of wounds or injuries incurred because of the bombing of the federal building in Oklahoma City on April 19, 1995;
* As a result of any of the terrorist attacks on Sept. 11, 2001, or,
* Due to illness from a terrorist attack involving anthrax occurring on or after Sept. 11, 2001, and before Jan. 1, 2002.
Relief is not available, however, for an individual who is identified as having been a participant or conspirator in any such attack or a representative of such an individual.
For the victims of terrorism described above, any income tax imposed by the Internal Revenue Code does not apply to the tax year in which the terrorist victim died or for any earlier tax year in the period beginning with the last year ending before the tax year in which the wounds, injury or illness occurred.
There is no limit on the amount of the credit or refund, and relief is available regardless of the amount of the victim's income. Victims are subject to selfemployment tax, however. Also, as discussed below, exceptions to the waiver of income tax liability do apply for certain types of income.
Example (1): Your client is the sole beneficiary of his wife's estate. His wife was an investment banker who was killed in the Sept....