Updated: December 28, 2023
In this Article

    What is the HEART Act? Officially known as the Heroes Earnings Assistance and Tax Relief Act, the HEART Act made important changes to how service members are taxed and how pension benefits are paid. Service members benefit from provisions of the HEART Act which affect:

    Some provisions specifically address tax and retirement pay issues related to service in the Guard or Reserve. Others apply to surviving spouses while others apply to military retirement plans in general.

    Heart Act The act was passed in 2008. Some of the benefits and provisions didn’t become active until 2009. There are benefits that are only retroactive to a certain date. For example, portions of the act’s laws affect only those surviving service members killed on duty since Oct. 7th, 2001. Other provisions may be unaffected by such restrictions on a case-by-case or a per-benefit basis.

    Surviving Spouse Benefits Under The HEART Act

    Under the HEART Act, survivors of military members who died on active duty may be entitled to certain benefits. They would be otherwise unavailable to them because of how Guard/Reserve active duty status affects civilian employer benefits. Some examples:

    • Companies who employ Guard or Reserve members who die on active duty are permitted to administer the employee’s insurance or other death benefits as though the Guard or Reserve member had been continuously employed. This is rather than having left for active service.
    • Surviving spouses who receive death gratuities and SGLI death benefits are permitted under the HEART Act to invest those benefits into a Roth IRA. Withdrawals are tax-free and without penalty, “at any time up to the amount of the initial investment.”
    • Surviving spouses are also permitted to deposit death gratuity and SGLI payments into Coverdell Education Savings Accounts. This money is considered tax-free “to the extent that such funds are used for the beneficiary’s qualified education expenses.” Any other use of such funds once deposited would be subject to taxation similar to withdrawal rules for other retirement plans.

    HEART Act Military Tax Relief

    • The HEART act directs that qualifying military members be given the option of penalty-free distributions from “all qualified retirement plans,” 403(b) plans, and 457 plans. The service member employee in such cases cannot make further elective contributions into the plan for six months after the date of distribution of the funds.
    • Guard and Reserve members who use employer provided flexible spending health care accounts are permitted to apply for refunds of their contributions at the end of the calendar year. Consider this rather than lose the money in cases where they have been called into active duty.
    • The HEART Act requires permanent penalty-free status of all qualified plan distributions taken by active duty reservists called to duty longer than 179 days. Reservists are permitted to “re-contribute these amounts at a later time under certain conditions.”
    • Mobilized Guard or Reserve members receiving differential pay from a civilian employer may have differential pay characterized as wages for tax purposes. This permits the service member to have taxes withheld on that income, preventing a large out-of-pocket tax burden. Small businesses (fewer than 50 employees) may claim a tax credit for 20 percent of the differential pay, up to $4,000.00 under HEART Act laws.
    • In cases where a military member must cash in certain “pension assets to make ends meet while mobilized,” the HEART Act allows Guard and Reserve members to do so without being charged the 10% early distribution tax penalty. Funds may be repaid penalty-free over a two year period after demobilization.

    Other Military Benefits Under The HEART Act

    • Economic stimulus payments (when available) are now possible for military families that include a non-citizen spouse and/or adopted child with an Individual Taxpayer Identification Number. This allows the family to claim the payment formerly available only to those with Social Security Numbers. The HEART Act allows stimulus payments for military families “who filed joint returns if at least one spouse was a member of the Armed Forces at any time during the taxable year.”
    • Military families receiving Supplemental Security Income (SSI) for a special needs family member will not have SSI reduced due to the receipt of military allowances or special pay. Prior to the HEART Act, Hazardous Duty Pay and similar compensation forced a reduction in SSI. This caused an undue burden on Guard and Reserve members called to active duty. Under the HEART Act, all non-taxable pay and military allowances are not to be included for the purpose of calculating SSI.
    • Veterans are exempt from a “first-time home buyer rule” denying eligibility to those with the purchase of another principal residence on their credit record in the three preceding years. Veterans using “qualified mortgage bonds to purchase a residence” are no longer restricted by this.
    • Five states have authority to issue “qualified veterans’ mortgage bonds.” Under the HEART Act, the limits of those bonds is increased to $100 million for those issued to vets in Alaska, Oregon, and Wisconsin. HEART also affects the rules for qualified veterans’ mortgage bonds issued in California or Texas. The act repeals a requirement in those states that veterans must have served before 1977 to qualify for the bonds.
    • Tax-free combat zone pay is classified as earned income, making combat zone pay eligible for Earned Income Credit on federal taxes under Heart Act provisions.
    • Tax-free status is given by the HEART Act to “certain state and local payments made to service members” who serve as volunteer firefighters or emergency medical responders in addition to being service members.

    Reminder: Tax Laws Are Subject to Change

    It’s good to remember that in cases where tax laws are concerned you should consult a tax professional to see how the current year’s tax laws affect provisions of the benefits under the HEART Act.

    The laws mentioned here themselves may not have changed. But you may find that other IRS or state tax requirements surrounding such investments may have different rules than in prior tax years.

    It’s never safe to assume that tax code will not change. Your HEART Act benefits may not change specifically, but if other rules that affect the same investments are different this year you may find you need the help of a tax professional to get the most out of your deductions where applicable.

    It’s also entirely possible that legislation such as the HEART Act itself could be revised and re-introduced in a given tax year. Whether or not such attempts actually pass remain to be seen, but knowing that such laws can change over time is helpful when making decisions on how to approach the current year’s tax filing.

    About The AuthorJoe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News

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