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.
Imminent Danger Pay Locations
The Department of Defense (DoD) frequently reassesses and updates the areas that qualify for Imminent Danger Pay (IDP). Imminent Danger Pay is a benefit given to troops serving in locations that are deemed to be hostile or dangerous. The benefit provides troops in imminent danger areas a bonus of $7.50 per day, up to the maximum monthly rate of $225.
Qualifying for Imminent Danger Pay: IDP is a location and risk based benefit. In general, the DoD considers areas where service members are at high risk for subject to the threat of physical harm or imminent danger on the basis of civil insurrection, civil war, terrorism, or wartime conditions. This includes exposure to gun fire, mines, rockets and mortar attacks, and similar acts of aggression.
Changes reportedly not budget driven: The statement released by the DoD stated the areas were removed from the IDP zones as part of a routine recertification process, and not due to budget constraints.
The review concluded, “The imminent threat of physical harm to U.S. military personnel due to civil insurrection, civil war, terrorism or wartime conditions is significantly reduced in many countries, resulting in the discontinuation of imminent danger pay in those areas.”
Locations removed from Imminent Danger Pay Zones:
A change in 2014 stated the following areas would no longer be designated as imminent danger areas for IDP purposes:
- The nine land areas of East Timor, Haiti, Liberia, Oman, Rwanda, Tajikistan, United Arab Emirates, Kyrgyzstan and Uzbekistan
- The six land areas and airspace above Bahrain, Kuwait, Qatar, Saudi Arabia, Serbia and Montenegro.
- The four water areas of the Arabian Sea, Gulf of Aden, Gulf of Oman, and the Red Sea.
- The water area and air space above the Persian Gulf.
Locations still included in the IDP zones include Iraq, Afghanistan, Egypt, Jordan, Lebanon, Pakistan, Syria, and Yemen.
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.
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