Tax Policy

Tax Treatment of Combat Pay

Tax Benefits For Military Service Members

Members of the U.S. Armed Forces serving in a designated combat zone are entitled to a variety of tax benefits. Specifically, military personal may exclude income earned for any month, even if part of which was spent in a combat zone. Additionally, military personnel may exclude from gross income any amounts paid while being treated in a hospital for wounds, diseases, or injuries incurred while serving in a combat zone.

The gross income exclusion applies to commissioned officers as well – but is limited to the following:

  • The highest rate of basic pay at the highest pay grade that any listed personnel can receive, and
  • the amount of hostile fire/imminent danger pay that the officer receives.

Earned Income Credit/Child Tax Credit

Although combat pay is excluded from gross income it is included in earned income for purposes of computing the earned income and child tax credit. This is important because these credits can be substantial and may be refunded even if there is no tax liability.

Not only will military personnel be able to exclude combat pay from their taxable income but they can also push their income tax liability below zero and receive refundable tax credits.

Additionally, combat pay may be used in calculating the allowable contributions to an individual retirement account (IRA). You must have earned income in order to contribute to an IRA and therefore combat pay is considered earned income for this calculation. An IRA allows military personal to save for retirement with tax-free growth.

Forgiveness of Tax Liability

The tax liability of a member of the U.S. Armed Forces is forgiven in the year the individual dies for the following reasons:

  • While serving in a combat zone, or
  • from wounds, diseases, or injuries inflicted while serving in a combat zone.

Tax liabilities incurred prior to service in a combat zone may be forgiven as well. In the case of a joint return, only the portion of the tax attributable to the service member may be forgiven. This tax forgiveness rule is also applicable to U.S. military personnel and civilian employees in terrorist or military actions – including acts of domestic terrorism.

Married Filing Jointly/Surviving Spouse

For purposes of determining the appropriate filing status, a spouse of a military service member who is missing in a combat zone is considered deceased on the date his or her status has changed from missing to dead. This means that a spouse may file a joint return even when their spouse is listed as missing.

Upon the change of status from missing to dead the surviving spouse may use the surviving spouse status for the following two tax years.

2018 Tax Law Changes

The Tax Cuts and Jobs act expanded the listed combat zones to include Egypt’s Sinai Peninsula. This means the 454 troops stationed in this area may benefit from the above tax benefits. The combat zone benefits are effective as of December 22, 2017 through December 31, 2025. They are also entitled to special pay under section 310 of Title 37 of the United States Code.

This article is intended for educational purposes only and should not be relied upon as tax, legal financial or other paid financial services. Consult with an advisor about how the information provided may impact your specific situation.

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