Combat Zone Exclusions

The Basics:

  • Exclude certain pay from your income while working in a combat zone.
  • Service outside a combat zone is considered to be inside a combat zone if the service is in direct support of combat zone military operations.

If you’re a member of the U.S. Armed Forces who serves in a combat zone, you can exclude certain pay from your income. You also have additional time to make a qualified contribution to an IRA. 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.

Income

The following income received during service in a combat zone doesn’t have to be reported as gross income:

  • Active duty pay earned in any month served in a combat zone
  • Imminent danger/hostile fire pay during a month served in a combat zone
  • Rre-enlistment bonus if re-enlistment or voluntary extension occurs during a month served in a combat zone
  • Pay for accrued leave — the Department of Defense must determine the unused leave was earned during the month served in a combat zone
  • Pay for duties as a member of the Armed Forces in clubs, messes, post and station theaters, and other non-appropriated fund activities earned during a 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 to the extent service in the year of service required to earn the repayment was performed in a combat zone
  • Bonus payments by a state or local government entity to a member or former member of the armed forces, if the payment is made solely because of service in a combat zone

If you’re a commissioned officer (other than a commissioned warrant officer), the combat pay exclusion for any month is limited to the highest rate on enlisted pay (plus hostile fire/imminent danger pay, if any).

You do not claim exclusion for combat pay on your tax return. The excludable amount should not be included in your Box 1 wages on Form W-2. If an excludable amount is included in your Box 1 wages, you should get a corrected Form W-2.

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.

You can also exclude military pay earned while hospitalized (you don’t have to be hospitalized in the combat zone). Your hospitalization must be due to having served in a combat zone. This is true even if you’re hospitalized after combat zone service.

Combat Zone Considerations

Military service outside the combat zone is, for tax purposes, considered to be inside a combat zone 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.

But in these situations, you’re not considered to be in a combat zone:

  • You’re present 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 2 points that are outside a combat zone.
  • You’re in a combat zone only for your personal convenience.

For more information, please contact us.