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
When determining the child and dependent care 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:
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
Certain educational expenses for dependents
Evacuation to a place of safety
Death gratuity payments to eligible survivors
Travel of dependents to burial site
Moving household and personal items
Moving trailers or mobile homes
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
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
You can deduct your travel expenses as an adjustment to income 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.
Disability, including payments received for injuries incurred as a direct result of a terrorist or military action
Group-term life insurance
ROTC educational and subsistence allowances
Survivor and retirement-protection plan premiums
Uniforms furnished to enlisted personnel
State bonus pay for service in a combat zone
In-kind military benefits:
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.