Combat Pay, Tax Style: Benefits When Serving in a Hot Zone

Military compensation is composed of several different components. Members of the armed service earn base pay, plus tax-exempt allowances for housing and food, as well as bonuses or special pay. Service members are eligible for various tax benefits that increase their net take-home pay compared with civilians. Among these benefits are the tax-exempt allowances for housing and food, which will often make up approximately 30 percent of a service member's total compensation, and the combat pay tax exclusion.

When a member of the military is serving in an area designated by the Department of Defense as a combat zone or is serving in direct support of military operations in the combat zone, he will qualify to have his income during that period excluded from federal income tax.

As U.S. Army recruitment officer Maj. John Henderson says, "The combat pay exclusion is a significant benefit for members of the armed services. It allows members of the military deployed in hot zones around the world to concentrate on their objective while knowing their government recognizes and appreciates their service."

Although any base pay earned by a member of the armed services while serving in a combat zone is excluded from federal income tax, it is still subject to Social Security tax and Medicare tax. The amount of the exclusion from tax is unlimited for enlisted service members, and for officers the exclusion limited to the maximum amount of enlisted pay.

Notably, states vary on whether or not the federal combat pay tax exclusion applies to state income taxes.

The combat pay tax exclusion also applies to other types of pay earned by a military service member during the same month as when serving in a designated combat zone. Most notably, this includes re-enlistment bonuses, which can mean a large amount of pay will be sheltered from federal income tax for the benefit of the enlisted service member and his family. Also, for officers, various types of special pay that depend on their career path or service location -- such as medical or dental pay, special assignment pay, hardship duty pay, foreign language pay, flight pay and sea pay -- are excluded from federal income tax during their period of service in a combat zone.

Like other tax benefits, the combat pay tax exclusion is of significant financial value to the member of the armed services as a taxpayer.

For example, if a member of the armed services is deployed to a combat zone for six months, half of his annual base pay is excluded from federal income tax. In practical terms this could mean excluding $14,000 to $16,000 of pay from tax; a single enlisted man with a 15 percent marginal tax rate would save in excess of $2,000 in federal income tax.

If a member of the armed services should be killed in action while deployed in a combat zone, or die later from injuries sustained while in a combat zone, his surviving family can make a special request with the IRS for forgiveness of his outstanding federal income tax debt. Notably, this tax relief also can apply to obtaining a refund for the surviving family if he already paid his taxes.

Did you know that TurboTax offers a version specifically designed for the unique needs of service members and their families? Check it out at our TurboTax Military Edition page.