Contributions of military death gratuities to tax-favored accounts.
The Department of Defense provides a payment of $100,000 to the survivors of a soldier killed in the line of duty. However, income limits and contribution restrictions exist limiting a survivor’s ability to contribute his or her gratuity payment to tax favored Roth IRA accounts. The proposal would allow survivors to contribute any amount up to the sum of the gratuity payment into a Roth IRA.

Differential pay for Reservists treated as payment of wages.
When a National Guardsman or Reservist is called up to active duty, their civilian job and civilian salary are placed on hiatus and they begin receiving military pay – an amount which is often significantly less than their civilian salary. There are currently many employers who voluntarily eliminate any pay gap of employees called up to active duty by paying the difference. Currently the IRS treats differential pay as benefits requiring reporting on the Form 1099. This is a burden for both the servicemember and the employer. The proposal would treat the differential pay as wages requiring the information reporting on the more easily accessible Form W2 and subject the differential pay to backup withholding.

Survivor and disability payments with respect to qualified military service.
The proposal would treat the death of a Reservist killed during military service as if employment terminated due to death for purposes of the employer’s life insurance, accelerated vesting, and other survivor benefits. For benefit accrual purposes, a Reservist killed during military service is treated as if re-hired one day before death.

Special distribution rules for Reservists’ unused health benefits.
Currently, if a Reservist is called up for active duty, any unused funds in a health flexible spending account or benefits in a civilian employer’s cafeteria plan must be lost. This provision allows a Reservist called up for active duty for at least 180 days to withdraw these funds without the health flexible spending account or cafeteria plan losing its status as such.

Permanent extension of election to include combat pay as earned income for EITC.
Combat pay is not subject to income tax. However, this provision can lead to lost tax benefits for lower-income service people because the earned income tax credit (EITC) requires some taxable income in order to qualify. Current law allows servicemembers to elect to include their combat pay as earned income for purposes of EITC. This provision expires on December 31, 2007. The proposal would make this election permanent.

Make Permanent qualified mortgage bond program to veterans.
Qualified mortgage bonds may be issued to finance mortgages for veterans who served in the active military without regard to the first-time homebuyer requirement.

Penalty-free withdrawals from retirement plans for individuals called to active duty.
Generally, a taxpayer who receives a distribution from a qualified retirement plan prior to age 59 ½ is subject to a 10-percent early withdrawal tax. In 2006, an exception to this 10-percent early withdrawal tax was provided for qualified reservists called to active duty for at least 179 days. Under this exception, the reservist may make an early withdrawal from a 401(k) plan, 403(b) annuity or similar arrangements without triggering the 10-percent tax and the reservist has two-years from the last day of the active duty period to contribute distributions to an IRA.

Treatment of uniformed service cash remuneration as earned income.
Allow most military cash allowances beyond basic pay to be treated as earned income for purposes of determining Supplemental Security Income (SSI) eligibility and benefit amounts for military families, and treat certain housing payments as in-kind support and maintenance.