Compensation for active service while in a combat zone isn’t included in gross income. The exclusion for a commissioned officer is limited. However, this doesn't apply to a commissioned warrant officer.

If you receive tax-free combat pay, you can include it as earned income:

• When determining the Earned Income Credit (EIC)
• When determining the additional child tax credit

For IRA purposes, nontaxable combat pay is included in compensation. This applies when figuring limitations on contributions and deductions of an IRA contribution. 

Other Excludable Income

Even if you received the income as a reimbursement or an allowance, you don’t include this income in your gross income:

Living allowances:

• Basic allowance for housing -- However, you can deduct mortgage interest and real-estate taxes on your home. This is true even if you pay these expenses with your basic allowance for housing.
• Basic allowance for subsistence
• Housing and cost-of-living allowances abroad, whether paid by the U.S. government or by a foreign government
• Overseas housing allowance

Family allowances:

• Certain educational expenses for dependents
• Emergencies
• Evacuation to a place of safety
• Separation

Death allowances:

• Burial services
• Death gratuity payments to eligible survivors
• Travel of dependents to burial site

Moving allowances:

• Dislocation
• Move-in housing
• Moving household and personal items
• Moving trailers or mobile homes
• Storage
• Temporary lodging and temporary lodging expenses
• Military base realignment and closure benefit  
  • For the military base realignment and closure benefit, the excludable amount can't be more than this equation:
    • 95% of the fair market value of the property for which the payments were made (before public announcement of intent to close all or part of the military base or installation) - Property’s fair market value (at the time of sale) = Maximum military base realignment and closure benefit exclusion
  • The Department of Defense determines:
    • 95% of the fair market value of the property for which the payments were made -- before the public announcement of intent to close all or part of the military base or installation
    • Property’s fair market value at the time of sale

Travel allowances:

• Annual round trip for dependent students
• Leave between consecutive overseas tours
• Reassignment in a dependent-restricted status
• Transportation for you or your dependents during ship overhaul or inactivation
• Per diem
• You can deduct your travel expenses as an adjustment to income on Form 1040 rather than as a miscellaneous itemized deduction if both of these apply:
  • You're a member of the reserves.
  • You travel more than 100 miles away from home in connection with your duties.

Other payments:

• Defense counseling
• Disability, including payments received for injuries incurred as a direct result of a terrorist or military action
• Group-term life insurance
• Professional education
• ROTC educational and subsistence allowances
• Survivor and retirement-protection plan premiums
• Uniform allowances
• Uniforms furnished to enlisted personnel
• State bonus pay for service in a combat zone

In-kind military benefits:

• Dependent-care assistance
• Legal assistance
• Space-available travel on government aircraft
• Medical and dental care
• Commissary and exchange discounts

You can’t exclude the value of your personal use of a government-provided vehicle.

To learn more, see these tax tips:

• Military Combat Zones
• Military Extensions
• Military Inclusions
• Military Moving Expenses