Tax Rules Affecting the Military, Part 3 Military Combat Zones

Many members of the U.S. Armed Forces who serve(d) in a combat zones are able to exclude portions of their pay from their taxable income. You will also be eligible for additional time to make a qualified contribution to an IRA, and be able to file an extension to complete your taxes without paying penalties.

A combat zone is an area designated by the U.S. President by Executive Order as an area in which U.S. Armed Forces are engaging in or have engaged in combat. For the qualifying areas, go to the IRS reference page for qualified combat zones.

Tax Exempt Military Combat Pay

The following income sources will be not be reported against your gross income if they are earned in a qualified combat zone:

  • Active Duty pay earned in any month served in a combat zone
  • Imminent Danger/Hostile Fire pay earned during a month served in a combat zone
  • Re-enlistment bonus if re-enlistment or voluntary extension occurs during a month served in a combat zone (annual installments will also be tax free).
  • Pay for accrued leave — the Department of Defense must determine the unused leave was earned during the month served in a combat zone
  • Awards or Achievement Pay made for a suggestion or achievement made in a month served in a combat zone
  • Student loan repayments if the entire year of service required to earn the repayment was performed in a combat zone

Special Rules Regarding Tax Exempt Combat Pay and Benefits

Qualifying for Tax Exempt Combat Pay: If you served in a combat zone for 1 or more days during a particular month, you’re allowed the above exclusions for that entire month. Combat zone service includes any periods you are absent from duty due to illness, wounds or leave. A person is considered to be serving in a combat zone if he or she becomes a prisoner of war or is missing in action if that status is kept for military pay purposes.

Commissioned Officer pay: Commissioned Officer combat pay exclusion (other than a commissioned warrant officer), is limited to the highest rate for enlisted pay (plus hostile fire/imminent danger pay, if any).





Pay earned while hospitalized due to having served in a combat zone: You can also exclude military pay earned while hospitalized (you don’t have to be hospitalized in the combat zone). This is true even if you’re hospitalized after combat zone service.

Combat Zones and other affected areas: Military service outside a direct combat zone qualifies as service inside a combat zone for tax purposes if the service is in direct support of combat zone military operations and the service qualifies you for special military pay for duty subject to hostile fire or imminent danger.

There may be certain exceptions to this, such as being in the area during leave, passing through during travel, or you are there for personal convenience.

Hazardous Duty Areas: Members of the U.S. Armed Forces who serve outside a hazardous duty area while supporting operations in a hazardous duty area are eligible for a tax filing extension. Meeting additional requirements may entitle you to full combat zone tax benefits.

Verify your tax status with professionals

Be sure to check with your tax professional, base legal office, or other qualified professional. These tips are only meant to serve as a guide, and are subject to change. Please check with a qualified professional before filing your taxes with the IRS.

See these related articles regarding military pay and taxes:




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Date published: April 8, 2008. Last updated: January 21, 2013.

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Ryan Guina is the founder and editor of this site. He is a writer, small business owner, and entrepreneur. He served over 6 years in the USAF and also writes about money management, small business, and career topics at Cash Money Life. You can also see his profile on Google

Comments

  1. Mike Kowalski says:

    I have a quick question. I’m currently serving in a Combat Zone, and I have a pending Board for Correction of Naval Records case to be heard. If I win my case and am awarded monitary compensation, will that amount be tax free if it’s awarded while I’m still in a tax free zone?

    Thank You in advance for your prompt reply.

    V/R

    HM2(SW/SS) Kowalski

    • Hi Mike, based on everything I have read, your military pay and compensation will be tax free if you receive it while in a tax free zone. That said, I am not 100% certain how your case would be processed. I recommend contacting your finance department for information specific to your situation. Thanks for your service.

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