Table of Contents
- Tax Exempt Military Combat Pay
- Combat Zone Compensation for Members of the Armed Forces
- Special Rules Regarding Tax Exempt Combat Pay and Benefits
- Qualifying for Tax Exempt Combat Pay – § 1.112-1 (b) Service in combat zone:
- Amount of Pay Excluded – § 1.112-1 (a) Combat zone compensation exclusion
- Hospitalization as a Result of Service in a Combat Zone § 1.112-1 (a) Combat zone compensation exclusion & (c) Hospitalization
- Reenlistment Bonuses and Installment Payments – § 1.112-1 (b) Service in combat zone
- Combat Zones and Other Affected Areas – § 1.112-1 (e) Service in area outside combat zone
- Other Tax Exempt Pay Related to Combat Zones
- Currently Recognized Combat Zones
- Verify Your Tax Status with Professionals
Many members of the U.S. Armed Forces who serve(d) in 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.
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 Pay/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 for the portion of the year you were present in a combat zone
The background for these statements can be found in the Code of Federal Regulations (CFR), Title 26, Section 1.112-1.
Pay Exempt from Federal Income Taxes
Your branch of service should classify your service as tax-exempt, and DFAS will not withhold federal income taxes from your base pay. However, according to the IRS, “military pay for earned while in a combat zone is subject to Social Security and Medicare taxes and will appear on your W-2.”
And while most states also exempt military pay from a tax-exempt zone, they are not required to do so. Check with your state tax agency for more information.
Combat Zone Compensation for Members of the Armed Forces
Title 26 of the CFR, Section 1.112-1, covers Combat zone compensation for members of the Armed Forces. This page provides many examples of which types of military income are tax exempt and under which circumstances. It would be a very good idea to familiarize yourself with this page if you have a unique situation.
Special Rules Regarding Tax Exempt Combat Pay and Benefits
Qualifying for Tax Exempt Combat Pay – § 1.112-1 (b) Service in combat zone:
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.
Amount of Pay Excluded – § 1.112-1 (a) Combat zone compensation exclusion
Enlisted Pay: The full amount of pay received while serving in a combat zone is tax exempt.
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).
Hospitalization as a Result of Service in a Combat Zone § 1.112-1 (a) Combat zone compensation exclusion & (c) Hospitalization
You can also exclude military pay earned while hospitalized as a result of wounds, disease, or injury incurred while serving in the combat zone. You don’t have to be hospitalized in the combat zone. This is true even if you’re hospitalized after combat zone service.
There may be certain time limits and exclusions for this type of pay.
Reenlistment Bonuses and Installment Payments – § 1.112-1 (b) Service in combat zone
Reenlistment bonuses for contracts signed in combat zones: Any reenlistment bonus earned due to a reenlistment contract that was signed while serving in a tax exempt combat zone will be tax exempt in its entirety. This also extends to any annual installments that will be paid in the future, regardless of whether or not the member is serving in a combat zone at the time the installment bonus is paid.
See U.S. Code – 26 CFR § 1.112-1 – Combat zone compensation of members of the Armed Forces, paragraph (b), Example 5 and Example 6 for more information.
In July, while serving in a combat zone, an enlisted member voluntarily reenlisted. After July, the member neither served in a combat zone nor was hospitalized for wounds incurred in the combat zone. In February of the following year, the member received a bonus as a result of the July reenlistment. The reenlistment bonus can be excluded from income as combat zone compensation although received outside of the combat zone, since the member completed the necessary action for entitlement to the reenlistment bonus in a month during which the member served in the combat zone.
Reenlistment bonuses for contracts signed outside of combat zones: ON the other hand, reenlistment bonuses earned from a contract that was signed outside of a combat zone are not tax free, even if the bonus installment is paid while serving in a combat zone.
In July, while serving outside a combat zone, an enlisted member voluntarily reenlisted. In February of the following year, the member, while performing services in a combat zone, received a bonus as a result of the July reenlistment. The reenlistment bonus cannot be excluded from income as combat zone compensation although received while serving in the combat zone, since the member completed the necessary action for entitlement to the reenlistment bonus in a month during which the member had neither served in the combat zone nor was hospitalized for wounds incurred while serving in a combat zone.
Combat Zones and Other Affected Areas – § 1.112-1 (e) Service in area outside combat zone
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.
Be sure to read Paragraph (f) Nonqualifying presence in combat zone for more information.
Other Tax Exempt Pay Related to Combat Zones
Hazardous Duty Pay is Tax Exempt
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.
Hostile Fire/Imminent Danger Pay (HFP/IDP)
A member is entitled to IDP when assigned to a designated IDP area. HFP/IDP is paid at a rate of $7.50 per day, up to a maximum of $225 per month. However, servicemembers who are exposed to a hostile fire event or mine explosion are eligible to receive the full monthly amount.
The commander determines HFP based on whether a member is:
- Subject to hostile fire or mine explosions
- In an area near hostile fire or mine explosions which endanger the member
- Killed, injured, or wounded by hostile fire, mines, or any hostile action
Members cannot receive both IDP and HFP in the same month.
Currently Recognized Combat Zones
According to the IRS, the following areas are currently recognized as Combat Zones.
Under the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, members of the U.S. Army, U.S. Navy, U.S. Marines, U.S. Air Force, and U.S. Coast Guard who performed services in the Sinai Peninsula can now claim combat zone tax benefits.
By Executive Order No. 13239, Afghanistan (and the airspace above) was designated as a combat zone beginning September 19, 2001.
- Afghanistan (see list of military installations in Afghanistan)
The following countries were certified by the Department of Defense for combat zone benefits due to their direct support of military operations in the Afghanistan combat zone.
- Jordan, Kyrgyzstan, Pakistan, Tajikistan, and Uzbekistan (as of September 19, 2001)
- Philippines (from January 9, 2002 through September 30, 2015)
- Djibouti (as of July 1, 2002)
- Yemen (as of April 10, 2002)
- Somalia and Syria (as of January 1, 2004)
Note. For the Philippines only, the personnel must be deployed in conjunction with Operation Enduring Freedom supporting military operations in the Afghanistan combat zone.
By Executive Order No. 13119, the following locations (and the airspace above) were designated as a combat zone beginning March 24, 1999.
- The Federal Republic of Yugoslavia (Serbia/Montenegro)
- The Adriatic Sea
- The Lonian Sea – north of the 39th parallel
Note. The combat zone designation for Montenegro and Kosovo (previously a province within Serbia) under Executive Order 13119 remains in force even though Montenegro and Kosovo became independent nations since EO 13119 was signed.
Arabian Peninsula Area
By Executive Order No. 12744, the following locations (and the airspace above) were designated as a combat zone beginning January 17, 1991.
- The Persian Gulf
- The Red Sea
- The Gulf of Oman
- The part of the Arabian Sea that is north of 10 degrees north latitude and west of 68 degrees east longitude
- The Gulf of Aden
- The total land areas of Iraq, Kuwait, Saudi Arabia, Oman Bahrain, Qatar, and the United Arab Emirates
The following countries were certified by the Department of Defense for combat zone tax benefits due to their direct support of military operations in the Arabian Peninsula combat zone.
- Jordan (as of March 19, 2003)
- Lebanon (as of February 12, 2015)
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: