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California conforms to the Military Family Tax Relief Act of 2003

Editor's note: On October 14, 2004, we published the original version of this article on our Website and in Tax e-News. In that article, we stated that the deadline to file amended returns to take advantage of some provisions of the federal Military Family Tax Relief Act of 2003 was November 11, 2004. We should have said the deadline is November 10, 2004.

California now conforms to the federal Military Family Tax Relief Act of 2003, which makes many changes to the taxation of military personnel. A couple of notable provisions include changes made to the exclusion of gains on the sale of a principal residence, and increases to the amount of exclusion of military death gratuity payments.

Regarding the rules for principal residences, California taxpayers have until November 10, 2004, (the same date for filing federal claims for refund) to file amended returns to take advantage of the new provisions for older years barred by the statute of limitations. An extended period is available for members serving in a combat zone or a contingency operation.

Exclusion on gain from sale of a principal residence by a member of the uniformed services or the foreign service

New law now provides that an individual may elect to suspend for a maximum of 10 years the five-year test period for ownership and use during certain absences due to service in the uniformed services (i.e., the Army, Navy, Air Force, Marine Corps, Coast Guard, the commissioned corps of the National Oceanic and Atmospheric Administration, and the Public Health Service). This provision is effective for sales or exchanges made after May 6, 1997. Taxpayers who want to make claims for refunds for older years that are otherwise closed by the statute of limitations (generally tax years 1997 through 2000) have until November 10, 2004, to make the federal election, which is binding for state purposes. This new provision also applies to members of the U.S. Foreign Service. When amending for state purposes, write "Military Family Tax Relief Act" in red on the top of the amended return. An extended period is available for members serving in a combat zone or a contingency operation.

Exclusion from gross income of certain death gratuity payments

Qualified military benefits include certain death gratuities with the level of the death gratuity exclusion increased from $3,000 to $12,000. The provision is effective for deaths occurring after September 10, 2001. Since the death gratuity income exclusion is increased retroactively, taxpayers who included part of the death gratuity as income for deaths occurring in 2001, 2002, or 2003, should file an amended return claiming a refund because of the change in law that excludes from income the full amount of death gratuity benefit. Write "Military Family Tax Relief Act" in red on the top of the amended return.