Nontaxable Combat Pay

 

If you’re a member of the U.S. armed forces who serves in a combat zone, you:

  • Might qualify to exclude certain pay from your income
  • Have more time to make a qualified contribution to an IRA

Both of these must apply for a place to be considered a combat zone:

  • It’s an area where U.S. armed forces are engaging in or have engaged in combat.
  • The area is designated as a combat zone by a presidential executive order.

Combat zone income

You don’t have to report income received during service in a combat zone as gross income.

For any month you served in a combat zone, you don’t have to report these types of income:

  • Active duty pay
  • Imminent-danger pay and hostile-fire pay
  • Reenlistment bonus
  • Pay for accrued, unused leave, as determined by the Department of Defense
  • Pay for duties as a member of the armed forces in:
    • Clubs
    • Messes
    • Post and station theaters
    • Other non-appropriated fund activities
  • Awards for suggestions, inventions, or scientific achievements. This applies if you made your submission in a month you served in a combat zone.
  • Student loan repayments if you served in a combat zone in the year of service required to earn the repayment

If you’re a commissioned officer, the combat pay exclusion for any month is limited to the total of:

  • The highest rate of enlisted pay
  • Hostile-fire pay
  • Imminent-danger pay

This limit doesn’t apply to commissioned warrant officers.

You don’t claim an exclusion for combat pay on your return. The excludable amount shouldn’t be in your W-2, Box 1 wages. If an excludable amount is in your Box 1 wages, you should get a corrected W-2. Nontaxable combat pay will usually be shown on your W-2, Box 12 with code Q.

If you served in a combat zone for one or more days in a particular month, you’re allowed the above exclusions for that entire month. Combat zone service includes periods when you’re:

  • Absent from duty due to illness, wounds, or leave
  • A prisoner of war or missing in action, if that status is kept for military-pay purposes

In some cases, you can also exclude military pay earned while hospitalized after leaving a combat zone. Your hospitalization must be due to a wound, disease, or injury incurred while you were serving in a combat zone.

Combat zone considerations

For tax purposes, military service outside a combat zone is treated the same as inside a combat zone if both of these apply:

  • The Department of Defense determines the service is in direct support of combat zone military operations.
  • The service qualifies you for special military pay for duty subject to hostile fire or imminent danger.

You’re not considered to be in a combat zone if any of these apply:

  • You’re in a combat zone during leave from a duty station located outside the combat zone.
  • You pass over or through a combat zone during a trip between two points outside a combat zone.
  • You’re in a combat zone only for your personal convenience.

To learn more, see these tax tips:

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