With Tax-Free Combat Pay, Filing a Return Could Get You a Big Credit

If you or your spouse served in a combat zone in 2012, you might not have enough taxable income that you're required to file a federal tax return. That's because the income that you receive while stationed in a combat zone might not be taxable. 

But you might want to file a tax return anyway, to claim a valuable tax break that puts dollars in your pocket.

It's called the Earned Income Tax Credit.

It’s a credit on your federal tax return that’s available to taxpayers who work, or have earned income, but don’t make a high income. It’s available for single filers with income under $13,980.

For families, the income limit depends on the number of children. A family with 3 children with income under $50,270, for example, could be eligible for at least a partial credit. For many military members, their wages fall into the earned income eligibility.

What’s a credit?

A credit reduces your taxes dollar for dollar, and part of this credit is available as a refund even if you have no tax.

How does nontaxable combat pay work?

For any month that you’re stationed in a combat zone as an enlisted member, warrant officer or commissioned warrant officer of the military, your earnings for that month are not taxable. For officers, the amount of their income not taxed is capped at the highest enlisted pay.

If you have questions about the definition of a combat zone, check out this IRS article: Military Pay Exclusion — Combat Zone Service.

Thanks to a special law just for the military, you can elect, or choose, to have your combat pay (that’s not taxable) considered “earned income” for earned income tax credit calculation only.

Should I elect that?

Probably. However you need to first determine if your refund actually increases when you claim the credit. If your spouse has wages or self-employment income, adding your combat pay may reduce or cancel the credit. Once your family income is greater than $17,000 to $22,000, the credit starts to decrease. So be sure to check which choice gets you more money.

If you use TurboTax to prepare your return, we ask about that election when your W-2 shows that you have nontaxable combat pay (box 12, code Q). If you elect to have your combat pay treated as earned income, be sure to verify that the refund in the refund monitor increases. If your refund is reduced, just go back and decline the election. 

IRS Questions & Answers on Combat Zone Tax Provisions

IRS Tax Information for Members of the Armed Forces

IRS Armed Forces' Tax Guide

I’m in the military. Do I need to file a state return?

Military Spouse Residency Relief Act and State Taxes